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Mortgage Insurance - Understanding its Role in the Home Buying Process



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By : Flynna Jones    99 or more times read
If you used a mortgage plan to finance your home buying process, you have probably by now have been burdened by an additional cost in your monthly amortization with an item called mortgage insurance. Surely this is an additional cost for you and perhaps you are wondering what this additional cost is all about and you are asking if this is it necessary to you. Many a homebuyer is in league with you in this regard because now-a-days any cost that you can eliminate from your monthly expenses is of great help for your financial needs.

What do you mean by mortgage insurance? Ever since investment risk came in to the picture, almost every investor wants to have some sort of protection for his investment. In other words investors want their money back in case any misfortune befalls his business venture. Mortgage investors are no different; they do not want to lose their money through lending. Thus, mortgage insurance was instituted to give lenders assurance that their money is guaranteed and protected through an insurance entity. The risk involve in mortgage lending is when borrowers defaults in their obligation. If there is insurance, the risk of loss will be lessen on the part of the lender; in case of default by the borrower, the risk is distributed between the lender and the insurance company.

If a buyer takes out a housing mortgage, before he can be approved, a buyer is required to put up a certain amount of equity before he can be approved for a loan. Usually the required amount is twenty percent of the value or price of the home that he intends to buy. But because some home buyers finds it difficult to come up with the required equity, they are required to secure mortgage insurance. Without this mortgage insurance it is very difficult for a home buyer to buy his dream house unless of course he has the money to pay for it in full. It can also be difficult for home owners who want to take a refinancing loan for home improvement purposes or any other purpose, without mortgage insurance especially if his home equity has not yet reach the required balance for him to get approved for a refinancing.

Mortgage insurance is a necessity for many would be home buyers; although at first glance it may seem an unnecessary cost for home buyers, it can give its worth because it can be a means for home buyers to fulfill their dream to buy their first home. In the recent years, there was a bill passed making mortgage insurance payments a tax deductible item in the income tax returns; this is like the mortgage interest payments that are allowed to be written off from the taxable items. However, the mortgage insurance has some restrictions in its tax deductibility provisions; it is advisable to consult a tax authority before availing this tax deduction.

It is also good to know that mortgage insurance is not a long term cost in the monthly amortization. Once a certain period of time is completed for paying the insurance, it can be stopped or a request can be made to remove it from the monthly amortization. In a regular mortgage loan, the required insurance payment is up to a year from the first year of the loan; it can also be removed if the balance of the mortgage has fallen below eighty percent of the total value or price of the home. Once the balance of the loan falls within the required amount for removal of the insurance, a request can be sent to the lender for the removal of the insurance. In some cases it is required to be removed when the loan balance falls to seventy eight percent of the original value of the home. In other cases, if the home has risen in its value, the lender will let the borrower get a reappraisal, although he has to pay for it. If the appraisal comes out with twenty percent equity, the lender will remove the mortgage insurance.

If however the loan is guaranteed by the FHA, the mortgage insurance will have to be paid for at least five years starting from the first year of the loan. When the balance falls to eighty percent, the insurance will be removed.
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