The question is perhaps better worded in this manner ‘do people
want to buy mortgage insurance?’ No, it is not the homebuyers
who need to buy mortgage insurance; the lender is keen that you take
out mortgage insurance along with your loan.
The issue of mortgage insurance arises when a buyer cannot put up adequate
equity in his home and practically the entire cost of funding it comes
from the money provided by the lender. In such a scenario, the mortgage
lender carries all the risk and in the event of a foreclosure, he will
end up with a lot of exposure.
Under the situation described, the mortgage lender will insist that
you purchase home loan insurance. In many cases, the insurance premium
is built into your mortgage payments and many people do not even realize
that their payment consists of a mortgage service element and an insurance
premium.
The insurance was taken out to cover the mortgage lender because your
equity in the house was low. What happens after a couple of years when
you have invested substantially in the house? What happens if the house
escalates in value?
Federal law provides that mortgage insurance is not required if an
owner has more than 20% equity in his house. This can happen if the
house escalates in value or after you make several years of repayments
or more likely a combination. However, lenders are happy to have their
loan insured and often do not take the increased value of the house
into account. It is up to you to get the house appraised independently
and get your insurance removed.
For mid range houses private insurance can add about 0.5 to 1% of the
cost and be as much as $50 to 150 per month in premiums. It is obvious
that savings here can mean thousands of dollars and if used to prepay
your principal, will reduce your tenure substantially. An appraisal
of the house will cost you around $300 and will pay for itself within
six months.
So stay alert to the possibilities of getting out of that mortgage
a few years earlier than what you thought was possible.
