Mortgage Insurance Companies – Why Do You Need Them?

Purchasing a home is a major decision in every American family that comes with its risks and benefits. While the advantages of having your own house are quite obvious – and out of the scope of this article – not everyone can afford to pay down 20% of the house value when signing a mortgage with a bank. For a rather modest fee, mortgage insurance companies will cover the difference between whatever you can pay down and the 20% typical cut-off the lender asks for, in case you run into financial difficulties and can no longer make your monthly mortgage obligations.

Coverage provided by mortgage insurance companies varies from 20% to 50%. If you take out a $200,000 mortgage, pay down 5% (or $10,000) and the lender asks the insurer to provide a 15% coverage of the $200,000 left, or $30,000, you will be left with an exposure of $160,000. If you default, your property gets foreclosed on and sold at a loss, the insurer will cover the first $30,000 of the lender’s losses.

Low down payments, now made widely available with the help of mortgage insurance companies, are immensely popular among low to middle income families. People can now either get a more expensive house they couldn’t have afforded before being able to close such a deal, spend the difference on furniture and renovation, buy a new car or simply get their dream cruise around the world. Sky is the limit.

Policies with mortgage insurance companies may be closed even before you are done with paying off the loan. Typically, the lender may allow you to cancel the insurance if you meet any of these criteria:

• You have paid off a large part of your loan. Once you have a good credit scoring, have a good record of paying your installments on time and have paid more than 20% of the amount you purchased your home for, you may ask for a cancellation of the insurance policy.
• You have made structural improvements in your home that considerably have raised its value. The policies regarding renovation vary among mortgage insurance companies, so you should check with them in advance if you plan on renovating your house and cancelling your policy.
• The market value of your house has risen. With the forecasted end of the recession, we are soon to expect some modest gains in home values. Experts’ opinions are that this option will be easily enforceable within the next few years.

A disadvantage of opting for mortgage insurance might be that it can cost you more than doing a combo loan (a second mortgage for the difference in your down payment and the 20% the banks like you to put down.) This is highly debatable, especially since private mortgage insurances are tax-deductible, but you have to do the math and see how the numbers fall for you. There is no general truth here, since it all depends on the rates you get from your lenders and the mortgage insurance companies your bank works with.