Here at RE/MAX Hot Springs Village, we have had the opportunity to work with so many buyers interested in joining our gated community. Some have come into it fully prepared; others were not ready for everything involved in buying a home. Take mortgage insurance. Many first-time buyers have no idea what it is. They do not realize that it adds to their monthly mortgage payments.
Sometimes known as PMI, mortgage insurance protects the lender and helps buyers get the homes they want. It is an added expense that makes buying a house more costly. But under the right circumstances, justifying the added expense isn’t hard at all.
What It Is, What It Does
Mortgage insurance is more or less an insurance policy obtained by a mortgage lender. It is designed to protect the lender against significant financial loss in the event a home buyer defaults on their loan. The policy pays for any outstanding balance the lender could not otherwise recover.
It is plain to see that mortgage insurance primarily benefits the lender. It protects the lender against what could end up being a risky mortgage. Interestingly enough, lenders don’t pay for mortgage insurance. They pass the cost on to borrowers. But before you decide that’s unfair, buyers benefit from mortgage insurance as well.
Mortgage insurance makes the lender more comfortable about approving a mortgage. So in essence, you have homebuyers that a lender might be wary of. But with mortgage insurance in play, those lenders can see their way clear to writing loans.
The Down Payment Is Key
It is hard to imagine a bank turning down any homebuyer who voluntarily offers to pay for mortgage insurance. But as a general rule, mortgage insurance is only required when buyers come into a deal with less than 20% for a down payment.
Coming up with 20% can be a challenge for some Hot Springs Village buyers. With housing prices higher than they have been in a long, long time, 20% is just not doable for some people. Mortgage insurance steps in and helps otherwise qualified buyers buy the homes they want.
Two Types of Mortgage Insurance
As experts in Hot Springs Village and Arkansas real estate, we can tell you that there are two types of mortgage insurance in Arkansas. The first is mortgage term insurance; the second is guaranteed level mortgage insurance. Term policies are by far the most common.
1. Mortgage Term Insurance
Mortgage term insurance is a lot like term life insurance. Its original face value matches the outstanding balance on the homebuyer’s mortgage. As the mortgage is paid down, the insurance policy’s face value also decreases. The goal is for both mortgage and insurance policy to eventually reach zero.
2. Guaranteed Level Mortgage Insurance
A guaranteed level mortgage insurance policy differs from term mortgage insurance in one key aspect: it offers a level payout to be applied in the event of the homebuyer’s death. The death benefit’s value remains the same for the entire policy term. For all other issues that could lead to default, the policy’s face value is the same as the outstanding mortgage balance.
It is understandable when homebuyers are unhappy to learn they need to pay for mortgage insurance. Adding insurance payments only makes their total monthly outlay higher. On the positive side though, mortgage insurance makes it easier for lenders to approve mortgages for some buyers they would otherwise turn away.
If you are getting ready to buy in Hot Springs Village, be aware that your circumstances may dictate the need for mortgage insurance. Factor that in to your financial decisions.