Mortgage Insurance - Home Owner Insurance
Although there are many items that
must be paid for as part of the closing of a loan, many people are surprised that one of the closing costs often
tacked onto a home mortgage is mortgage insurance, also called hazard insurance,
home owner insurance or just HOI. Since they have already arranged for
homeowner's insurance, they may not understand what mortgage insurance is and how it works.
First of all, mortgage
insurances do not protect you, but instead are insurance policies that protect the lender in case you default on
the loan. This is usually paid to a private insurance
company. Because a mortgage is often in the vicinity of hundreds of
thousands of dollars, if there were no insurance to back it up the lender would lose a tremendous amount of
money when a borrower stops paying on the loan. The lender charges
the borrower the cost of this insurance so that lending the money is not as risky. This insurance allows the lender to offer low rates to the borrower who needs
the home loan.
While you may often see
an amount for mortgage insurance as part of the closing costs, you will be even more likely to see it on the
Good Faith Estimate or Truth-in-Lending documents. The reason for
this is that you will be making a monthly payment toward this insurance policy each month when you make your
mortgage payment. In other words, it will be added to your loan on
a monthly basis. It is good to know that this does not go on
forever. Once the amount of your loan is less than 80% of the value
of your home, you can usually drop the mortgage insurance. Often,
when you do mortgage refinancing on your home you will have to continue
paying this insurance unless your home's value has increased enough to make your total mortgage refinance less
than 80% of the value of the home.
For people who are
looking at bad credit mortgage loans, home owner insurance will be needed unless they make a 20% down payment on
the initial loan. As you can see, it doesn't matter what kind of
loan product you get, you may be required to pay for the additional mortgage insurance in order to get the
loan. The rates for mortgage insurance premiums tend to vary from
one lender to the next, so it is a good idea to shop around for the lowest rate if you think you will end up
paying mortgage insurance. If you can make a large enough down
payment, you won't have to deal with mortgage insurance at all.