What Is Mortgage Insurance on Commercial Mortgage Loans?
When you take out a commercial loan, you might be required to carry mortgage insurance. Mortgage insurance is not the same as mortgage life insurance, which is often optional life insurance coverage for loans. Instead, mortgage insurance is insurance required by your lender to protect him from you defaulting on the loan.
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Identification
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Mortgage insurance protects your lender. If you default on your commercial loan, the lender still gets his money. Under certain circumstances, you may be able to keep your property, as long as the payments are being made (even if the insurance company must make them on your behalf). This insurance is specifically designed to pay for your risk to the borrower. Rates for mortgage insurance may be up to 1 percent of the total loan proceeds, paid annually or on a monthly basis, on your loan. For example, if you have a $100,000, the mortgage insurance may be up to $1,000 per year (1 percent of $100,000). You can pay the insurance premium annually, though it might be automatically included in the mortgage payment every month.
Disadvantage
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The benefit of mortgage insurance is primarily for the lender. This is insurance that protects the lender from your default. You pay the premiums on this insurance. So, for the lender, this is free insurance against your inability to pay your loan. These premiums cannot be refunded to you and even if the insurer pays the mortgage payments, you may still have late payments reported to your credit report if the insurer fails to pay the loan payments on time or it takes a while to make all back-payments you've missed between the time you initially defaulted on your payments and the time when the insurer processed the mortgage insurance claim.
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Solution
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When you have at least 20 percent equity in your commercial property, request that the lender cancel the mortgage insurance. In most cases, the lender will comply and you won't need to carry the insurance. This also means you won't have to make the payments on the insurance so your total cash outlay associated with the loan will decrease.
Consideration
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Even if you manage to get rid of the mortgage insurance on your loan, you should still put an equivalent amount of money away as a cash reserve for the business. This ensures that payments can be made in the future if the business ever experiences any financial difficulties and is temporarily unable to make payments on the commercial loan.
You may be able to avoid commercial loan mortgage insurance if the company keeps at least 10 percent of the total cost of the project associated with the loan as cash or bank-approved securities.
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