Understanding Mortgage Insurance
Whether you’re in the process of buying your first home or you’ve been a homeowner for years, there are few phrases that hit right to the bone like “mortgage insurance.” Why, you’re not sure entirely, but lots of people indicated that it was terrible and you were going to regret it.
As usual, the truth lies somewhere closer to the middle. Mortgage insurance is not your enemy, but it can be a costly surprise if you’re not prepared. Let’s dive into this hot button topic.
What Exactly is Mortgage Insurance?
Mortgage insurance is a type of coverage that your lender will take out on your loan to help shield them against loss should you default. They generally only require it if you have less than 20 percent down and often, this monthly payment will drop off once you’ve paid your home loan down to the point that your house has about 22 percent in equity versus its mortgage.
To be clear, this insurance does not cover you — at least not directly. In the case of default, the bank gets the check, but you get something, too. In many states, even recourse states, the mortgage insurance can be enough to prevent the bank from coming back on you for the difference between what you owe and what it was able to recover at a public sale.
Having mortgage insurance does not guarantee you will be free and clear should you lose your home, but it sure helps, especially if that house is in good condition when you turn it over to the bank. Its original purpose was to make it easier for people to get mortgages, even if they couldn’t come up with a big down payment, but during the housing bubble a decade ago many homeowners discovered that it can help on the back end, too.