If you own your home, do you know if you are paying out for mortgage insurance each month? Many people don’t. It is often one of those fine details that get lost in all the mess of paperwork and decisions that go into buying a new home.
What exactly is mortgage insurance? It is insurance the bank that holds your loan will require in certain circumstances. The insurance doesn’t protect you, the homeowner, from any catastrophe. This insurance only protects the bank if you foreclose on your loan. A typical misconception is the insurance will protect you from losing your home if you can’t make your payments. This is absolutely false; all this insurance does is protect the bank’s investment in your loan and house value.
Due to the risk of certain loan situations, many mortgage banks require mortgage insurance to cover their risk. The most common example is when your loan amount exceeds 80% the estimated value of your home. If you were unable to make your payments and the bank had to foreclose, there is the potential they could lose money in the process. Between the cost of foreclosure and selling fees, most homes sold in foreclosure only claim 80% of their equity.
If you are buying a home with less than 20% down, you will have to pay mortgage insurance initially – but not indefinitely. Check to see if you are paying mortgage insurance. If it is not clear on your loan statements, call them directly. Then, watch the value of your home. If your equity increases to over 20% of the value, you can petition to have the mortgage insurance requirement removed. This is well worth your time as most mortgage insurance payments are at least $100 a month and basically are just throwing your money away.
For more insurance information also check out our Insurance Blog!
Related Articles:
*Private Mortgage Insurance (PMI)–What If Your Home Value Has Increased?
*The Homeowner’s Protection Act (HPA) of 1998