Home Loan Insurance

Buying a home is a very costly experience for most people and the fact that you will need home loan insurance only adds to the coat of buying a home.

When you are planning your finances for your home purchase besides the down payment and closing costs you will really need to include for home loan insurance costs that are required to be in place before the lender will release the closing funds.

Home Loan Insurance-Required to Close a Mortgage

Before the bank will release your mortgage check to the closing attorney it will need to be satisfied that the following home loan insurance policies are in place:

Homeowner Insurance

Homeowner insurance is basically a fire insurance policy with clauses for owner liability in the event of an accident to personal belongings or personal injury. Most homeowner insurance policies will have a contents clause covering the contents and personal belongings of the policy holder and their family members.

Title Insurance

Title insurance is required by mortgage lenders to protect their interest in the event that an error by the title examiner causes them to loan on a property which is not free and clear. The lender title insurance policy only protects the lender however an additional owner title insurance is available to the borrower if they wish to purchase it. Title insurance for a lender covers the mortgage amount whereas title insurance for an owner covers the purchase price of the home.

Private Mortgage Insurance or PMI

PMI or private mortgage insurance is an insurance cover required by almost all mortgage lenders for loans of more than 80% loan to value. What this means is that if you are putting down less than 20% then your lender will require that you pay a monthly private mortgage insurance premium to protect them in the event of a default and subsequent foreclosure.

It may be possible to put down less than 20% and avoid paying PMI by using a strategy where you8 take out an 80% first mortgage and a small second mortgage to bridge the difference between your down payment and the 20%.

For example if you have a down payment of 10% on a $200,000 home you would need a second mortgage for the additional 10%

Home purchase price  = $200,000.00

Down Payment                = $ 20,000.00

First Mortgage 80%      = $160,000.00

Second Mortgage 10%  = $ 20,000.00

Total Purchase Monies = $200,000.00

Also if you are paying PMI and feel that your homes value has appreciated you can have it appraised and if your equity exceeds 20% you can ask the lender to drop their PMI requirement. Before you hire an appraiser make sure that they are acceptable to your lender.

Disaster Insurance

If you live in a area prone to flood or earthquake which are considered acts of God and not covered by most homeowner insurance policies your lender will require that you have a clause inserted into your homeowner insurance policy covering your home for any likely disaster scenario. These clauses can cost a lot of extra cash so before you commit your name to a purchase and sale agreement have your real estate agent check out the location of the home to see if it needs any extra insurance over and above normal homeowners insurance.

Home Loan Insurance Costs

Before you finally commit to purchasing a home do your homework and make sure that you are financially ready to put pen to paper and sign on the dotted line.

The cost of home loan insurance can be very high taking into account that you may be buying 4 policies.

Remember you will be paying upfront for:

• Homeowner Insurance
• Title Insurance for the bank
• Title Insurance for yourself

And you may be paying monthly for private mortgage insurance or PMI.

PMI- Private Mortgage Insurance

PMI or private mortgage insurance is an insurance that a lender will require a homeowner to take out if the mortgage amount is for more than 80% loan to value of a home purchase mortgage. This basically states that if a homeowner is buying a home for $250,000 and the mortgage is for more than $200,000 then the borrower will be required to pay a monthly private mortgage insurance premium. This type of home loan insurance is put in place totally to protect the lender in the event of a mortgage default by the homeowner.

What is PMI

If a homeowner who has borrowed more than 80% to fund the purchase of a home goes into default and is foreclosed on the private mortgage insurance company will pay the lender an amount up to the 20% conventional down payment that the foreclosure sale fall short by.

How Much Does PMI Cost

Monthly PMI premiums can be substantial in our example above of a $250,000 home purchase if the homeowner only made a down payment of 10% then the home loan amount would be $225,000. In this scenario the monthly private mortgage insurance premium would be $116.25. This would be on top of the principle and interest payment of $1496.93 assuming a home loan at 7% interest rate over 30 years.

When estimating the monthly service of a home loan it is also necessary to factor in real estate taxes and homeowners insurance which may or may not be escrowed.

How to Avoid PMI

There are some ways to get around PMI the best being to take out a second mortgage for the difference between your down payment and 80% of the home purchase price. Inn our example of a $250,000 home purchase where the homeowner can only afford a 10% or $25,000 down payment then the home buyer would take out a second mortgage for 10% or $25,000. This would negate the need for PMI and save the homeowner $116.25 every month.

In a scenario where property prices have escalated and the homeowner can prove that their equity position in the home is for more than 20% of the outstanding balance of the first mortgage, then the homeowner can have the lender agree to cancel the PMI policy.

Home Loan Insurance

Home loan insurance is a necessary part of becoming a homeowner whether it is hazard insurance or PMI (private mortgage insurance). From the perspective of the homeowner it is necessary to perform proper due diligence to ensure that you do not end up paying for unnecessary home loan insurance.