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Chrisman’s Corner: Borrowers Should Understand Mortgage Insurance

Many of our AEs and their brokers have been in the business for a long time and have grown accustomed to speaking in “mortgage talk.” But what about borrowers who don’t understand basic parts of the process and loan such as mortgage insurance? Mortgage insurance protects the lender against losses due to a default by the borrower; it isn’t like car insurance or life insurance.

 First of all, brokers will usually tell the borrower that mortgage insurance is required on all FHA loans, regardless of the down payment, and must be paid for the life of the loan in most cases.

Even private mortgage insurance on conventional loans is not required under all situations. JMAC’s brokers know that lenders will not loan more than 80 percent of the sales price of a home without mortgage insurance (unless a second mortgage is arranged). Our brokers help explain to their borrowers there are, like other forms of insurance, a premium to be paid either monthly with the mortgage payment, in one lump sum as part of the closing costs, or the lender may pay it in return for an increased interest rate.

The amount of the premium depends on the type of loan (FHA or conventional), loan-to-value ratio, loan amount, credit scores and whether or not the mortgage is a fixed rate mortgage or an adjustable rate mortgage.

JMAC’s brokers know that the mortgage insurance on conventional loans doesn’t last forever. Borrowers paying their insurance in small increments every month must pay for a minimum of two years and then the policy can be canceled after the loan-to-value ratio drops to less than 78 percent. The loan-to-value ratio calculation will be based on the price of the home at the time of purchase and not upon the home’s value after two years unless the increase in value of the home is due to remodeling.