Applying for a mortgage is a lengthy process that involves a lot of paper work. It is sad to note that not so many people are familiar with the terms used in a mortgage agreement and therefore get lost in the translation. Some of the common terms used in the mortgage process include credit score, loan term, interest rates and mortgage insurance. Not many people are sure what mortgage insurance is and what it entails. If you ever find yourself in a position where you do not understand the terms of your mortgage agreement, ask your realtor to help translate what some of these terms mean. Read on to find out more on mortgage insurance!
What is mortgage insurance for?
When you are applying for a mortgage, most lenders require one to make a deposit of 20% of the property value. However, lenders do understand that not everyone is able to pay the deposit all at once and this is where mortgage insurance comes in. Mortgage insurance protects the lender against losses when a borrower is unable to repay their loan and still the equity in the home is not enough to cover the amount owed.
Mortgage insurance is not only for the lender’s protection but it also allows borrowers who cannot make the 20% deposit to get a loan. There are different factors that determine the mortgage insurance payments. The lender usually looks at the borrower’s LTV profile and his credit to determine the level of the credit risk. If your lender thinks you are a high credit risk then the cost of mortgage insurance will increase.
Can mortgage insurance be canceled?
Mortgage insurance taken from FHA or any government-operated institution cannot be canceled. On the other hand, private mortgage insurance can be canceled and allows a borrower to save a considerable amount of money during the loan repayment term. Lenders are required to cancel your mortgage insurance once your LTV (Loan to Value Ratio) drops below 78%. For example, let’s say you have a $100,000 loan and you pay $50,000. This means your LTV is 50% and this allows you to cancel your mortgage insurance.
How to reduce overall mortgage costs
Financial advisers encourage one to plan ahead before applying for a mortgage. What most people don’t realize is that your credit score determines how much you are going to pay for your mortgage. Ensure that you clear your monthly credit card payments and any other loan you have to increase your credit score. This way, lenders are able to give you a loan with low interest rates. If you have a bad credit score, you don’t need to worry since you can still apply for a mortgage loan. Look for lenders who are willing to negotiate on your repayment plan before signing up with them.
Get a good real estate agent to help with mortgage insurance
The whole process of obtaining a mortgage can be overwhelming to some people. In this case, you can look for a real estate agent to help you identify your dream home and help you with the process of a mortgage application.