Guest Post by Allan Jones
The recent housing downturn in the US and other Western countries has made consumers more familiar about different financial products. Prior to the interesting times, people have not paid much attention to lenders mortgage insurance. But now, we are getting more aware of it.
What is a lenders mortgage insurance, anyway?
Also known as private mortgage insurance in some countries, the lenders mortgage insurance is another type of insurance that is payable to a lender to fund a pool of securities required when taking a home loan or mortgage. In general, it is an insurance that is designed and aimed at offsetting losses in case the borrower suddenly becomes unable to repay the home loan and the loan provider becomes unable to recover the costs of lending because the mortgage home has fallen into foreclosure.
Who is involved?
The lender is the party directly applying for this type of insurance. It does so usually from its centralised mortgage processing centre. Mortgage brokers, bank staff, and other loan representatives cannot apply for such mortgage insurance contracts. It is also the lender, instead of the borrower, that is covered by the lenders mortgage insurance. It has to make sure that it can recover the money spent for providing the loan. A recent survey of consumers found that many mortgage borrowers still are unaware that only their lenders are covered by this insurance.
Who pays for it?
Logically, the borrowers pay for lenders mortgage insurances. Some consumers complainthat the insurance payment somehow makes the total amount payable bigger. But lenders can always justify the need for the insurance. They have to protect their welfare against risks in the event the mortgaged home is foreclosed. But not all mortgages come with it. Usually, you will only be charged of the insurance if you are getting a home loan that covers at least 80% of the homes purchase value. Experts advise consumers to make bigger down payments so they will not have to borrow much from a mortgage. Lenders mortgage insurance also tends to be a one-off insurance premium that is collected during the settlement.
Lenders mortgage insurance can cover most types of residential property loans. Those may include owner-occupied, construction, property investments, home improvement/extension, principal/interest, low-doc, and interest-only loans. In other words, the insurance can be expected in any type of purpose the mortgage may take.
Why should you pay for the lenders mortgage insurance, you may ask? On the side of lenders, the insurance provides confidence to approve mortgages. It logically boosts their ability to lend through home loans to a broader range of borrowers. On the part of the borrowers, the lenders mortgage insurance can assure them that they can get the mortgage immediately so the home purchase can be made sooner. It will also allow them to pay as down payment/deposit even less than 20% of the purchase amount, which can mean a lot of leverage to borrowers.
Andrew authors the ALC Blog, where he writes about refinance, low doc loan and home loans. Aside from the ALC blog, Andrew also contributes to personal finance sites with regular articles.