It’s no secret that home prices continue to skyrocket, sending many Houston residents scrambling for loans to help pay for their new residential property. However, there’s a catch: many lenders will require borrowers to take out mortgage insurance before providing them with a loan.
What is mortgage insurance? Why is it particularly common when the down payment is less than 20%? Below, Champions Mortgage, one of the best mortgage lenders in Houston, Texas, shares everything you need to know about mortgage insurance if you’re looking into your options. The team is also available to help when you need an experienced mortgage professional in Houston who always puts your best interests first.
What Is Mortgage Insurance?
Mortgage insurance is a specific type of insurance policy that safeguards the property’s title holder or the mortgage lender when someone takes out a mortgage loan. It ensures the title holder or lender still receives payment if you default on repayments or break the lender’s contract.
It’s common for these mortgage insurance policies to feature either a pay-as-you-go payment method or a lump-sum payment requirement.
Types of Mortgage Insurance Policies
Mortgage insurance comes in three primary variations:
- Private mortgage insurance
- FHA mortgage insurance premium
- Mortgage title insurance
Private Mortgage Insurance (PMI)
Private mortgage insurance provides coverage when a borrower receives a conventional loan but with a small down payment, typically below 20%. Risk-averse lenders will often require borrowers to obtain private mortgage insurance if they use a conventional loan to refinance their mortgage or if the equity falls below a certain percentage of their home’s market value.
At its core, this insurance variety protects the lender if the borrower fails to pay them back for any reason. However, it’s also important to note that the loan-to-value (LTV) ratio rule allows those borrowers forced into taking out private mortgage insurance a reprieve. They can usually cancel their mortgage insurance component after repaying 20% or more of the loan’s principal balance.
Private mortgage insurance premiums in Houston may depend on several factors, including, but not limited to, the following:
- Private mortgage insurance type
- Adjustable or fixed interest rates
- Mortgage term (the home loan’s duration)
- Loan-to-value ratio
- Lender’s required insurance coverage amount
- Credit score
- Home’s value
- Whether the policy supports refundable premiums
- Risk factors decided by the lender
FHA Mortgage Insurance Premium (MIP)
As government-backed mortgages, FHA mortgage insurance premium policies come from the United States Federal Housing Administration. This mortgage variety requires borrowers to buy mortgage insurance premiums.
For example, people will pay their mortgage insurance until their loan terms expire, or they can make at least a 10% down payment. If you manage to pay the 10% down payment, the Federal Housing Administration will remove the mortgage insurance premium after 11 years.
Borrowers must pay the following after obtaining a FHA mortgage insurance premium:
- An upfront mortgage insurance premium
- An annual mortgage insurance premium
Mortgage Title Insurance
Mortgage title insurance policies protect beneficiaries if something happens that invalidates the sale. For example, if the person selling the home isn’t the real homeowner, the home buyer’s mortgage title insurance will protect them from potential losses.
Before a lender closes a mortgage title insurance policy, the title company or lawyer conducts a title search. This title search assesses various public records to verify a home’s legal ownership, thoroughly examining the following documents:
- Deeds
- Tax liens
- Land records
- Court judgments
Say the title search proves the property’s seller isn’t the real owner. The buyer’s mortgage title insurance will prevent them from paying any fees associated with the sale.
A Word On Mortgage Protection Life Insurance
What is mortgage insurance? Is it different from mortgage protection life insurance? Mortgage protection life insurance is not a mortgage insurance in the way we’ve discussed above.
Rather, mortgage protection life insurance protects lenders if the borrower passes away before fully paying back their mortgage. Although lenders don’t require borrowers to carry mortgage protection life insurance, it’s extremely beneficial to the borrower’s family or heirs, who would otherwise have to pay off the outstanding mortgage after the person’s death.
A borrower may decline mortgage protection life insurance. However, they must then complete additional paperwork to ensure they understand the associated risks.
How To Calculate Mortgage Insurance
The lender will recalculate your premium yearly. They may also reduce it over time if you continue paying off the principal diligently.
When estimating your mortgage insurance, it’s best to start with the maximum. So, if the rates fluctuate between 0.1% and 1.0%, start with 1%.
Utilizing a mortgage calculator is one of the easiest ways to calculate your potential mortgage insurance payments. Many online mortgage calculators allow additional expenses into the calculation so that you can get a more accurate estimate of how mortgage protection insurance, property taxes, and homeowners insurance will change your financial commitment.
Do VA Loans Need Home Mortgage Insurance?
Veterans Affairs loans are unique government-backed loans designed for military veterans and their families. The U.S. Department of Veterans Affairs gives specific guarantees to lenders and doesn’t force mortgage insurance requirements or down payments.
Do USDA Loans Need Mortgage Insurance?
Like VA loans, USDA loans are unique government loans reserved for people buying properties in rural areas. The U.S. Department of Agriculture backs USDA loans. It doesn’t require borrowers to have private mortgage insurance, regardless of their down payment.
However, borrowers must pay the following:
- An upfront fee (a percentage of the loan amount)
- An annual fee that replaces mortgage insurance expenditures
Contact Champions Mortgage for Outstanding Lending Services in Houston
If you’re a Houston, Texas, resident wanting to buy a house, make things easier with help from professionals who understand the ins and outs of mortgages, insurance, and more. Why not connect with Champions Mortgage? We can help you simplify the home-buying process, navigate minimum mortgage requirements, and understand the financial repercussions of foreclosure.
What is mortgage insurance worth when things go wrong? Find out more from Champions Mortgage at (281) 727-2500 or reach out to us online for help in Houston, Texas, today!
