Mortgage Insurance is a common term that is being thrown around by a lot of mortgage professionals right now but the problem is that many of them don’t really know what its purpose is and if they do, they typically don’t explain it to their clients. So today, we will address what Mortgage Insurance is and some of the misconceptions about it.
Let’s first look at why a person needs Mortgage Insurance or MI as it is often called. If you are purchasing or refinancing your home and you have less than a 20% down payment or equity in your home, you may need MI. If your house is worth $250K and you have a 1st mortgage of more than $200K your lender may require that you have MI to insure your mortgage. What the MI does is insure the lender incase of a foreclosure.
That is most common confusion around Mortgage Insurance. It is an insurance policy that the borrower is paying, so it seems logical that this MI is somehow set up to protect the borrower in some way. This is completely wrong though. Mortgage Insurance protects the lender not the borrower.
That being said, many home owners are finding out though, unless you have a 20% down payment or equity position, Mortgage Insurance may be the route you have to go. This is a recent trend in the mortgage market because a few years ago, no one did mortgage insurance because if was easy and cheap to go get a second mortgage or HELOC which would eliminate the need for mortgage insurance if they didn’t have that magic 20%. Unfortunately, those times are gone because most of the lenders holding the 2nd mortgages and HELOCs are loosing big right now.
A positive note, Mortgage Insurance is now tax deductible in many cases*. Also, if you pay the 1st mortgage down on you home so that you have an equity position of 22% or more, you can petition your lender to remove the MI. You just have to figure out a way to start rapidly paying down the principle balance of you mortgage.
*Please consult your tax advisor about tax deducibility of Mortgage Insurance.
