Many newer homeowners are paying for two types of insurance with their mortgages and only one of these products protects them.
A homeowner’s insurance policy covers damage to the property and losses from fire, burglary, vandalism, and natural disasters. When you have a loss, you will file a claim with your insurance company that will also be subject to a deductible amount stated in your homeowner’s policy documents.
Homeowners who have a mortgage on their property can also be subject to the lender requiring they carry adequate insurance on the property and name the lender as an additional insured party. This protects the lender in that the home will continue to be sufficient collateral for the loan in case of a loss.
Mortgage insurance is solely for the protection of the lender if the borrower defaults and is not like homeowner’s insurance. It is typical for lenders to require mortgage insurance on any loan greater than 80 percent loan-to-value. Sometimes they will require it on some loans less than 80 percent based on their underwriting requirements and if there is anticipated risk from the borrower.
A VA loan will not require mortgage insurance. A conventional lender can require it but it must be removed when the loan amortizes below the stated percentage. And if you get it on an FHA loan it will be required for the life of the loan.
When you get to the point where your property has appreciated enough and you can refinance to create a loan-to-value ratio of less than 80 percent, mortgage insurance can be removed or not required. This is a strong motivator for some homeowners to refinance.
Unfortunately, mortgage insurance premiums are not regulated in most states like homeowner’s insurance. Most buyers will worry about their mortgage interest rate but will be less concerned about their mortgage insurance premium.
As a homeowner, you can select the carrier for your homeowner’s policy, but the lender selects the carrier for the mortgage insurance. When you are interviewing lenders, the type of insurance required, and the price of mortgage insurance should be included in your discussion.
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