One of the things that I’ve learned a little bit about since we bought our house, was something that I didn’t have a clue about when we first started looking. Heck, I didn’t even have a clue about it after we bought out house. Mortgage insurance was just something that the mortgage officer told us we had to have, so it got added.
For a long time, I just thought it was an annoying little fee that they (the lenders) added on to the mortgage payment to squeeze a few extra dollars out of me. In some ways, that’s correct. Much like any other insurance, it’s really only there in the case of a real need for it. If you don’t ever need it, it feels like you’re paying a bunch of money to someone for something you don’t need. If you do end up needing your insurance, though, it can truly be a lifesaver.
Unlike some of the other insurances you’ll buy, mortgage insurance doesn’t really protect you. With car insurance, or health insurance, the direct beneficiary is you. If you get into a car accident, your car insurance will help pay for repairs, and your health insurance will help pay for medical bills. With mortgage insurance, if you need it, it’s really the lender that will benefit. The way it works is much like any other insurance. But, when an accident happens, and you default on your mortgage, the insurance pays off the mortgage to the lender. It’s protection for the lender against default.
Generally, you only have to carry mortgage insurance until your loan-to-value is below 80%. Come up with 20% down payment, and you won’t even see it. Some lenders will automatically take it off of the mortgage once you fall below that 80% LTV, others won’t, so you need to keep an eye on the loan and make sure that it’s being removed when it should. Most first time home-buyers will have some form of mortgage insurance on their loan.
Is mortgage insurance an annoyance or a helper? I think it’s a little bit of both. You’re buying insurance which only benefits you in that it may allow you to pay a lower down payment than normal. It’ll mean that you don’t get the mortgage paid off as quickly as well since you’ll not only start with a larger loan, but have a chunk of your monthly payment siphoned off. It also helps in that it does help you get a loan with a lower down payment because it assures the lender that the mortgage will be made good should you default.
Do you have mortgage insurance on your mortgage? Do you think it’s more of an annoyance or a helper?
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Money Beagle says
I’ve owned two places in my life and in both cases I put 20% down, so I’ve never had to pay mortgage insurance. You’re right it is insurance that works in the same manner as others, but the difference is that the potential beneficiary is the bank (or mortgage holder) and not you.
It is an annoyance. I put only 10% down so I currently have PMI. Since it is a condo, I am paying the HOA and PMI, which don’t contribute to the equity of the place at all. My goal is to pay my mortgage aggressively once I am done with the student loan payment to get out of the PMI.
If at all possible, most lenders will advise people to put down as much as possible. At least 20% down will help save costs all around: no mortgage insurance, fewer points to pay, and a lower mortgage amount on which to pay interest. My lender advised me to do so on my first house, and I will forever be grateful!
Jon @ MoneySmartGuides says
I pay mortgage insurance on my house and hate it! Any future home I buy, I’ll make sure I put enough down so that I don’t have to pay it.
Mike @ Accountingdiaries.com says
It’s definitely not helping anyone apart from the loan provider! It’s the bank that has the risk of having a bad debt due to any reason so it’s the bank that should pay the insurance. I think it’s the most unfair thing especially since the interest rates were not reduced because of the insurance.