Home Insurance and Mortgages

In the case of Home Insurance and Mortgages, there are essentially 3 parties: the borrower, who is also the homebuyer, the lender and the mortgage insurer.

What is mortgage insurance?

It's a financial guaranty that insures lender against a loss in the event a borrower defaults on a mortgage. If the borrower defaults on the payment and the lender gets title to the property, the mortgage insurer reduces or eliminates the loss to the lender. In effect, the mortgage insurer shares the risk of lending the money to the borrower.

Is Mortgage insurance useful for first and second homebuyers?

Yes. All homebuyers are eligible for mortgage insurance. This allows them to become homeowners sooner, and increases their purchasing power. First-time homebuyers can use the low down payment to help them afford their first home, or to purchase a more expensive home sooner.

Second homebuyers can put less money down and gain significant tax advantages because they will have more deductible interest to claim. They can also use the cash they would have used for a large down payment for investments, moving costs or other expenses.

Benefits for borrowers:

Low down payments

Without the guaranty of mortgage insurance, lenders insist that a borrower make a down payment of at least 20% on the price quoted for the home he desires to purchase, which can mean shovelling up years of saving for some borrowers.

This large down payment assures the lender that the borrower is committed to the investment and will try to meet the obligation of monthly mortgage payments to protect his investment and reduce the chances of defaulting.

If there is the mortgage insurance to fall back on, lenders will accept a minimum of 5% or 10% down payment from borrowers. Mortgage insurance thus fills the gap between the standard requirements of 20% down and an amount the borrower can more easily afford to put upfront on a purchase.

A low down payment also allows borrowers to purchase more homes than they might otherwise be able to afford.

With mortgage insurance (and a satisfactory income and credit history), the borrower could make a flat payment of only 10% and buy a home worth $100,000 with the $10,000! Or he could forward $7,500 on a home priced at $75,000 and use the remaining $2,500 for decorating, investing, or buying a car or major appliance. Mortgage insurance widens a borrower's options.

Payment

Generally borrowers are expected to pay the mortgage insurance. An initial premium is collected at closing and, depending on the premium plan chosen, a monthly amount may be included in the house payment made to the lender, who in turn makes the payment to the mortgage insurer. There are also flexible premium plans available to the borrowers:

• Annual: In this plan, the borrower pays the premium for the first-year at the time of closing the deal; and an annual renewal premium is collected monthly as part of the total monthly house payment. This is perhaps the most expensive of the three.
• Monthly Premiums: The cost in this case is higher than the normal mortgage insurance plans but the premiums paid monthly, will drastically reduce the costs incurred on closing the mortgage insurance. Borrowers pay for mortgage insurance monthly as part of their total monthly house payment but only need to pay one month's mortgage insurance premium at closing, rather than a year's.
• Single: The borrower pays a one-time single premium (instead of an initial premium and later renewal premiums). Individual premiums are normally financed as being a part of the mortgage loan, no ‘out-of-pocket’ cash is used for mortgage insurance at closing.

Refundable and Non Refundable Premiums

These plans also offer the borrower, the choice of refundable or non-refundable premiums.

A refundable premium gives the borrower the chance to receive money returned on any unused portion, if that mortgage insurance cover is discontinued before the loan is paid in full. The cost for a non-refundable premium is slightly less than that of the former, thereby giving the borrower a chance to make small savings. However, if coverage is discontinued on a loan with a non-refundable premium, the borrower is not given a refund.

Note that having mortgage insurance can actually put borrowers in an advantageous position enabling them to increase their buying power, put less money down and purchase a home sooner.