How Does Mortgage Insurance Apply to #Kitsap Home Buyers?

What is Mortgage Insurance?

We recently covered the role of Homeowner's Insurance in your new home purchase.  Today, we want to talk about Mortgage Insurance, which many (most?) people obtaining a mortgage will encounter as well.

If you've never had a mortgage before, it might be a surprise to find out that Mortgage Insurance is likely to be part of the package.  Unlike Homeowner's Insurance - which protects your property and belongings against loss and damages (and indirectly, protects the lender's investment) - Mortgage Insurance explicitly protects the lender against (potentially) default on loans they've made.

Most commonly, borrowers who put down less than 20% of the purchase price, will find they need to also pay for mortgage insurance, but lenders vary on this point.  One notable exception is a loan backed by the VA - in those cases, the VA itself is guaranteeing the loan, so no additional mortgage insurance is necessary.  Of course, VA loans have stringent requirements of their own, something we've covered in posts of interest to military-affiliated buyers.

Another way buyers may find divergence, is according to whether they have a conventional loan, or one of the federally backed loans such as FHA or USDA.  In the former case, private mortgage insurance will be arranged.  For the latter, mortgage insurance is paid directly to the agency handling the loan.  Occasionally, you may find a lender who pays the premiums for your Mortgage Insurance, but at a higher interest loan rate - so you may have to do some number crunching and see which is the best decision for your own financial situation.

Be aware, as a matter of being careful about the funds due from a homebuyer at closing, that you may need to pay some of your Mortgage Insurance up front, as well as having it be a part of your monthly payment (which also includes your taxes, loan principal, interest, and homeowner insurance.)  This should all be disclosed to you up front by your lender, and not come as a surprise on closing day.

Finally - a happy ending!  You do not pay for mortgage insurance endlessly (unlike homeowner's insurance.) Once your loan balance drops to roughly 80% of the original loan (programs vary a little, read your own fine print) you can cancel the program, having shown yourself to be a worthy borrower.  You might even find a way to cancel it sooner - you might find that home improvements or booming home values bring your equity up significantly, compared the outstanding loan.  (You'd likely need an appraisal for this situation.)

We suggest the article What is Mortgage Insurance from the US Consumer Financial Protection Bureau, a government site, as a jumping off point for additional reading.

Please give us a ring at Dupuis Team if you're preparing to start a real estate journey - we'd love to give you a hand!

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