Mortgages are available in different types. Your mortgage broker may have explained to you some of the more common terms in mortgage lingo such as closed, open, fixed, and variable, but still, there’s a lot to cover to fully understand the technicalities of mortgages.
One of the confusing aspects of mortgages is insurance. If you want to have your estate protected in case of your death before you finish off the loan, you need to get a mortgage life insurance. This type of insurance protects the borrower.
Another type of insurance coverage protects the lending party in case you default on the mortgage. This is what is referred to when insured mortgage is mentioned. It is when the mortgage is covered by an insurance policy via a housing authority or a private insurance company. If you default on your loan, the insuring party will have to pay an amount equal to the insured amount or the loss incurred, whichever is lower.
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Who Pays For Mortgage Insurance?
Depending on the location, insurance for mortgage loans may only be available through the housing authority, and not through a private entity. Either way, the policy is directly paid by the lender to the insuring party, but the cost is shouldered by the consumer, and in this case, the borrower.
The premium for the mortgage insurance is dependent on the amount of the down payment and is calculated as a percentage of the purchase price of the property. This percentage typically falls between 1.8 to 3.6 percent. If you are confused on the computation process, a professional broker can help explain it to you.
The amount may not be that intimidating when you first look at it but these little percentages can accumulate over time and can amount to thousands of dollars. You have the option to pay in bulk or have the monthly premium payments added to your monthly mortgage. Be aware, though, that there are locations that won’t allow including the premium in the monthly loan payments, so be prepared to pay the premium, in full.
Should You Insure Your Mortgage?
When buying an estate, the first thought that comes into your mind is paying a big down payment, around 20 percent and above of the property’s purchase price. Bigger down payment means lower monthly payments for the mortgage. But the same can’t be said when mortgage insurance is involved since the premium is dependent on the amount of the down payment, so you’ll end up paying higher. Also, insured mortgages usually come with lower administrative fees and interest rates since there will be lower risk on the lender’s part because of the coverage given by the mortgage insurance.
Housing authorities or insurance companies may offer discounts of up to 25 percent for homes that are deemed energy efficient. This significantly reduces the mortgage insurance’s financial impact. This is especially beneficial if you have other outstanding loans that are not insured and come with high interest. You can use the extra money to pay off the unsecured and high-monthly loans first and opt for a smaller down on the property.