What is an Insured Mortgage?

Introduction

When you think of buying a property, you start saving up money for a down payment. Some people have ample money saved up for a down payment. But for those who don’t have enough money, there’s “Insured mortgage” or “Mortgage insurance”. If you have already figured out that you don’t have enough money to afford a standard down payment which is usually 20% percent for most conventional loans, but you still want to buy that house, don’t worry we’ve got you covered. Mortgage insurance will help you get that house and make you look more attractive to the lenders.

What is Insured mortgage?

There are several types of mortgages. While you may have heard the more common mortgage terms such as closed mortgage, open mortgage, fixed mortgage and variable mortgage. There’s always more to learn when we talk about mortgages.

From many mortgage terms, there’s one confusing mortgage concept called insurance. One can get mortgage life insurance in order to protect their estate if they die before paying off their loan. You can also get the mortgage loan insurance which protects protection to the lender in case if you default on your mortgage. The latter type of insurance is what is referred to when talked about insured mortgages.

Insured mortgage is an insurance policy that provides mortgage lenders or the titleholder with the protection in the event when the borrower defaults on their mortgage payment or the loans or is unable to meet his contractual obligation of the mortgage. Defaults may include failure to make a payment due to job loss, death or medical bills. Mortgage insurance can be provided by a government agency like FHA or VA. You can also get mortgage insurance from a private mortgage insurance company (PMI). As a loan borrower, you will be paying the premiums and the lender is the beneficiary.

Another mortgage insurance is “Mortgage life insurance”, which pretty much sounds familiar with mortgage insurance but this one is for the protection of heirs if the borrower passes away while owing his mortgage payments. Depending on the terms and conditions of the insurance policy, either the lender or the heirs is paid off.

What is Mortgage Life Insurance?

A mortgage life insurance policy pays a death benefit to the money lender if a home borrower dies during the span of a mortgage loan. These term policies are designed to match the number of years remaining on a mortgage, with death benefit amounts that regulate annually to reflect the reduced mortgage balance left after every year.

Insured Mortgage vs Conventional Mortgage

Not sure what kind of mortgage do you need when buying your next home? What is the difference? Let’s talk about the different type of mortgages we have in America. These are conventional mortgage and insured mortgage.

In a nutshell, you will require an insured loan when you put less than 20% down payment but in case you put 20% or more than that, then your loan will become conventional.

Insured mortgage means that it’s actually default insured. The mortgage or the home will go into foreclosure. The coverage of the banks is through default insurance. This insurance will protect the lenders against mortgage default and allow the consumers to purchase a house with a minimum down payment of 5%.

 

Mortgage insurance is available for conventional loans. Mortgage insurance is required for all loans where the home loan does not have 80% equity. People can avoid mortgage insurance by either putting 20% down payment or getting a second mortgage for the amount above 80%. For instance, an 80/10/10 would be an 80% first, 10% second and 10% cash.

Conventional loans are those insured by Fannie Mae, Freddie Mac, VA or FHA. When you put more than 20% down payment, you have 20% equity in that property and you don’t require any default insurance. The mortgage is just between you and your lender. The rates are slightly higher than usual due to the fact that this one isn’t insured.

The repayment method for both the mortgages is the same. It’s just the rates that might differ and the amortization can differ as well. But the repayment is going to work in a similar manner. You can do the payments weekly, biweekly, monthly or semi-monthly. And the same amount will be paid down.

The most important difference between an insured loan and a conventional one is that when one has an insured loan, the qualifying details and approval is grounded on the criterion and the final verdict of the insurer. Any bank that will insure a deal will be using the insurers guidelines (exceptions can be made) so the mere difference is between the banks at this stage the interest rates and the bank’s policy concerned with matters, for instance pre-payment privileges. So if a loan has been refused by one of the insurers at one bank, then that loan will most probably be refused with that insurer at any bank.

Having said that, for conventional loans a bank will make its own approval decision based on its own rules and qualifying guidelines. Hence it’s very important to work with a professional who is well aware of all the rules and knows which insurer to select in your case and can provide you with proper guidance.

How does mortgage insurance work?

The buyer has to bear all the cost of mortgage insurance, but the coverage is for the lenders. Mortgage insurance provides payments to the lender and protects them in case if you stop making your mortgage payments. If you are still answerable for that loan that you can’t pay, you could easily lose the house in foreclosure if you fall behind.

Mortgage is very different from mortgage life insurance, which is an insusrance policy for a borrower who passes away and can’t pay the rest of his remaining mortgage or the mortgage disability insurance, which is for a burrower who becomes disabled and eliminates their mortgage.

 

Why is mortgage insurance mandatory?

Mortgage insurance is a term that could be applied to different sort of insurance products. Amongst others we have mortgage payment protection, critical illness cover, income protection and life insurance. But the two terms “mortgage life insurance” and “mortgage payment protection insurance” are what that cause the confusion.

Mortgage payment protection insurance is an insurance policy that ensures that the mortgage payments are being paid in case if anything is happening to you that could prevent you from making the payment.

The answer to this title is not always but mortgage insurance is definitely important.

If you purchasing a property on your own and you do not have any dependents then you might not need a mortgage payment insurance as if you happen to pass away during the mortgage term, your property can be sold off to pay the outstanding mortgage. But if you have a family, you should consider getting a mortgage protection insurance because if anything goes wrong this will affect your loved but the policy can prevent the trouble and keep a roof over their heads.

There is not a single product that has coverage for all the possible forms of ‘mortgage insurance’, but the idea of these coverage is still the same, to cover your mortgage payment in case of a suffering, illness, accident, death or unemployment. It’s important to make yourself familiar with the different products come under the vast term of mortgage insurance’, so that you make the suitable choice for your insurance policy.

Benefits of mortgage insurance

There are several reasons as to why mortgage insurance is beneficial for homeowners. First and foremost, it can prove to be helpful for those who are willing to buy their first house. Having a mortgage insurance would make lenders to offer you with lower interest rates on your mortgage.

A significant barrier that many people face during buying a home is saving a down payment of 20%. In fact, research says that it can take up to 10 years, considering the average income and home price in the United States of America. To gain a better understanding of why mortgage insurance might be a good option for you, some of its benefits are listed below

  • Better interest rates

The protection that the mortgage insurance offers to lenders allows the lending company to introduce the homebuyers to better interest rates. This works to combine the cost of the purchase of the home for the buyer.

  • Access to the Marketplace

Homebuyers who aren’t employed and otherwise don’t have an access to a stable income can also benefit from mortgage insurance. Mortgage insurance makes sure that a buyer who is outside the traditional marketplace can also fit for a low cost mortgage while keeping the lender’s interests into consideration.

 

  • Transfer of mortgage insurance

Another benefit of mortgage insurance is that you can transfer it from one property to another property. Hence an owner who is looking to purchase a new property can just save his premiums over time and can transfer his insurance to his new property.

 

  • Purchase the property with a Smaller Down Payment

Mortgage insurance allows the buyers to enter the marketplace with only a small down payment. This is beneficial for buyers who don’t who ample money for down payment but still want to invest in a property.

 

  • Provide protection in case of job loss

The constant mortgage insurance premium payments can provide protection to the homeowner in case if they lose their job for some time. This can prove to be vital for Americans who have growing families, and can offer a way to keep away from stress and financial trouble due to unemployment. Lenders now offer insurance options to particularly manage time when the homeowners are unemployed, suffering from an illness or are otherwise unable to meet their financial obligation.

Conclusion

Insured Mortgage guards the lenders in the occasion the borrower defaults on the loan payment. Defaults contain inability to make installments as a result of death, hospital expenses and occupation misfortune. Insured mortgage can be given by a private home loan insurance agency (PMI) or by an administration organization like FHA, Freddie Mac, Freddie Mae or VA. As a borrower of the loan, you pay the expenses and the loan lender is the beneficiary.

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