Mortgage insurance protects the lender in the event an insured is unable to afford their loan payments. This coverage pays the lender a portion of the loan principal, though the homeowner will still be responsible for the loan balance and is vulnerable to foreclosure if they don't catch up on payments.
The upside of mortgage coverage for the insured is that it can allow a buyer to purchase a home with a down payment of less than 20% while still qualifying for a home loan.
As NerdWallet explains, this kind of mortgage coverage is different from a mortgage life insurance policy, which would pay off the remaining mortgage balance if the borrower dies, or mortgage disability insurance that would pay the mortgage for a period if the insured becomes disabled.
There are two main types of mortgage insurance for conventional loans: PMI and MIP.
PMI, or private mortgage insurance, is offered for conventional mortgages with low down payments, according to NerdWallet. The cost of the PMI is determined by several factors, including the size of the home loan and the borrower’s credit score.
Those who have an FHA home loan are often required to have an MIP, or mortgage insurance premium, upfront, regardless of the amount of the down payment. According to NerdWallet, the annual MIP is paid in monthly installments for the duration of the FHA loan if the buyer put down less than 10%. However, if they put down more than 10%, they will pay the MIP for 11 years. The annual premium ranges from 0.15% to 0.75% of the outstanding loan balance, with most home buyers paying around 0.55%.
In the slideshow above, we’ll look at the ten U.S. cities with the largest amount of mortgage insolvency, according to data from WalletHub.
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