Features of Mortgage Insurance
Home sweet home comes with a price tag. Most homes are bought with a mortgage loan in which a bank or a moneylender gives you the funds and allows you to repay it in affordable installments. As security, the lender holds already existing property or any object of equal or more value as security. This means that in the event the borrower fails to make the periodic payments, this security can legally be seized by the lender to cover his losses.
Many people do not already own property that can be offered as security to banks and individuals. This is where Mortgage insurance comes in. For those that cannot offer security and a 20 percent down payment on a loan, a Mortgage Insurance is the mechanism by which they can secure one to buy property. If you want to buy or invest on any international real estate project, like DAMAC Properties, ERA Real Estate or Lodha Upper Thane, you will get assistance from developers to get housing finance and your property buying would be hassle free.
The two types of Mortgage insurance plans are PMI (Private Mortgage Insurance) and Mortgage Insurance Premium. These are legal mechanisms created to help the low income bracket to secure a loan.
The two types are applicable on different kind of loans: Conventional and FHA
A conventional loan is one where the borrower must pay a certain amount of down payment to secure the loan. This type of loan is flexible in terms of interest rate and down payment amount.
When you take a conventional loan with a down payment of less than 20 per cent of the original amount, you will be asked to take a PMI (Private Mortgage Insurance) from a company that offers it.
The premium is generally set between 0.5 to 2 per cent of the total loan amount. Once you prove your reliability and commitment to the repayment scheme, this insurance will be cancelled. To be eligible for this cancellation, your loan balance must reach at least 78 per cent of the original amount and your payment history has to be watertight. The law requires the lender to cancel the PMI but you can request cancellation once the amount dips below 80 per cent. There are, however, exceptions to the 22% rule. If the house is rented out to someone, the PMI can be cancelled only after 30-35 percent of the amount is paid.
There are different types of PMIs available. For e.g., you can choose a single premium loan where the premium is paid in a lump sum at the end of your payment cycle.
This type of loan is insured by money lenders that are FHA (Federal Housing Administration) approved. Typically, the down payment required on an FHA loan is 3.5 per cent.
FHA loans have more lenient credit and income requirements than standard loans.
MIP is a premium that’s paid when an FHA loan is taken.Unlike PMI, MIP payment cannot be cancelled as the down payment required on an FHA loan is only 3.5 per cent. This type of loan can only be finalised when a small amount of cash is paid to the lender.
PMI and MIP are indeed very convenient for those who cannot afford the requisite down payment but mortgage insurance isn’t without its pitfalls either. In the long run, the premium proves very costly and excessive. The decision to go for either of these should not be taken lightly. It should definitely not be viewed as a quick fix or a magical solution. Take your needs and abilities into careful consideration when you choose what kind of loan suits you best.
If you do choose the mortgage insurance way, you need not wait for your salary to start the application process now. If you work freelance or have varying work hours you can get fast funding until wage day with any of the numerous instant funding apps available online.