What Is Home Mortgage Insurance?
If you have taken out a residential mortgage lately, you probably have a home mortgage insurance policy along with it. Most lenders now require this type of insurance to protect themselves unless you can come up with a cash down payment of 20 percent of the home's value. One common way to get around this requirement is to obtain a second loan for 20 percent of the value and use those funds as the down payment to the first lender.
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Function
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Home mortgage insurance protects a lender from losses that may occur if the borrower defaults on his mortgage. The exact time period before a claim is filed depends on the foreclosure laws in your state. Once the grace period is over and the lender forecloses on the mortgage, the lender can then file a claim against the borrower's mortgage insurance policy and receive reimbursement up to the maximum limit of the policy.
Benefits
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While the borrower is responsible for paying the monthly mortgage insurance premiums, the lender is the primary beneficiary of the policy. However, the availability of home mortgage insurance has opened up opportunities for homeowners who would not otherwise have been able to obtain a loan. The insurance policy reduces the lender's risk to a point where it is acceptable to issue mortgages without requiring a large down payment.
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Amount
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The actual monthly premium for home mortgage insurance varies by individual lender, but a general rule of thumb is to estimate one percent of the total loan amount per year. Under a Federal Housing Authority (FHA) mortgage, the first year's premiums are included in the loan balance to ensure that the lender is paid upfront. This requirement can be waived if the homeowner pays the yearly premium in cash when the loan is signed.
Termination
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Most lenders permit the homeowner to cancel the home mortgage insurance policy once there is a certain amount of equity in the home. The minimum may vary by lender, but is generally 20 or 25 percent of the mortgage amount. Some lenders may also impose a minimum waiting period of one or two years. This gives the lender a guaranteed period of protection in the case of a new homeowner whose home has suddenly increased in value.
Warnings
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Payments from the mortgage insurance company to your lender do not eliminate your financial responsibility if you default on the loan and the home is foreclosed. The insurance company may be able to collect that money back from you, depending on the foreclosure laws in your state.
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References
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