How mortgage insurance works?

Mortgage insurance comes in a variety of options. There are so many options that they tend to confuse many people into assuming that an option has advantages in the wrong areas of need. Which is best option depends on your individual situation. So consult a specialist to determine what you need and ask the specialist to explain how mortgage insurance works.

Most commonly, mortgage insurance is taken out because the borrower can not come up with the minimum down payment. There are low down payment alternatives to mortgage insurance (MI). Each has its own benefits and drawbacks. Here are a few of the more widely used options to help you understand how mortgage insurance works.

Monthly or Zero Monthly Mortgage Insurance
Premium payments are paid monthly through your mortgage payment. When the cancellation is complete your mortgage payment will decrease the amount of the premium.

Single Premium Mortgage Insurance
This payment option consists of a single premium, usually financed into your mortgage. Because the mortgage is amortized over a long period of time, this usually results in a lower monthly payment. If you cancel your mortgage insurance before the coverage period ends, you may receive a cash refund.

Lender Paid or "No MI" (no mortgage insurance)
Some lenders advertise low down payment loans with no mortgage insurance. Usually, these loans DO carry mortgage insurance premiums; it's simply paid by the lender. The lender covers the premium through an increase in the interest rate on the loan. These policies usually carry no refund potential, and cannot be cancelled by the borrower.

Home Mortgage Protection Insurance
This offers low fixed monthly costs without the extra fees or paperwork of combo loans. You get the protection your lender requires, with an added benefit for you--the security of payment protection in the event of involuntary unemployment.

There are many other options for alternatives to mortgage insurance. Each with its own draw backs and benefits. Combo or piggyback loan replace mortgage insurance with a second loan amount for over the 80% that is left for the down payment. These types of loans usually have higher interest rates and could cause a homeowner not to be able to make one or the other payment. This can result in a foreclosure of the home.
 
There are many government programs that offer low down payments. VA and FHA are run by the government to make sure you get the best possible loan for your financial situation. If you have a very low income and a stable work history, you may qualify for local or national homeownership initiatives. One of the more widely known programs is Habitat for Humanity. Habitat requires you to invest "sweat equity" by working on the construction of your own home. To learn more about existing programs in your area, contact your local housing authority.

The problem with mortgage insurance is that it does not protect you from foreclosure. It protects the lender. You will still owe any amount that is due when the foreclosure takes place. The mortgage insurance carrier will cover the outstanding amount to your lender, and will sue you for the exact due amount. Many times this type of insurance is mistaken for a mortgage payoff insurance.

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