The question of “what is mortgage insurance” might appear the first time you were planning to buy a house. Even after the definition of mortgage insurance had been explained, you might be still confused because this type of insurance does not look like any other insurance. This is so because the one who buys the insurance is actually buying that insurance to insure other parties. Then, what is the point of calling it insurance? What is mortgage insurance actually?
Definition
Buying a house seems to be everyone’s dream but since the price of property is high, people are obliged to seek for financial supports. And of course, there are plenty of loan providers which are willing to help them; with a condition. The condition is that they must apply for a mortgage insurance that will protect the loan providers in case the borrower cannot pay the loan credit.
This seems to be more logical now that you have to pay something for others’ benefits. But you also obtain a benefit of buying a house, though, which is indirect yet a very significant advantage. However, what is mortgage insurance being purchased for if it cannot benefit the borrowers as well?
Requirements
Mortgage insurance is usually required if the borrowers pay the upfront payment as less than 20 percent of the house price. This percentage is seen as minimum and there is a fact for lenders that the smaller the down payment, the greater the risk they would face. What is mortgage insurance’s aid to help lenders handle the risk, then?
Mortgage insurance will pay the remaining credits that cannot be paid by the borrowers. For instance, a borrower can only pay 5 percent of the house price for down payment then stops making a payment, the mortgage insurance will pay the remaining 15 percent to meet the minimal credit percentage agreed by the borrower.
Payment Techniques
After mentioning a little about percentage in previous section, you may be triggered to ask what is mortgage insurance’s type of payment?
The most popular financing technique for mortgage insurance is called 80-10-10, which means with a down payment which is worth 10 percent of the property’s value, the borrower should pay 80 percent on the first mortgage while the remaining 10 percent must be paid on second mortgage. This technique is created to help the borrower from paying a high down payment while allowing him or her more time to pay the first mortgage. In this model of payment, the rate of second mortgage is set with a higher interest rate to encourage the borrower to pay off the credit faster.
While 10 percent upfront payment could be challenging for some people, there is another financing technique that allows the borrower to pay 5 percent for down payment, which is called 80-15-5. The first mortgage will be 80 percent of the property’s value while the second mortgage will be 15 percent.