The main insurance that any borrower is going to need when buying a home is "Homeowners Insurance". This insurance protects the borrower against damage to the home via fire, robbery, etc. It is necessary, when there is a mortgage, to carry Homeowners Insurance as it protects the owner and the lender in the event of a catastrophy (like a fire) to recoup the loss.
Another type of insurance that is sometimes required is Flood Insurance. This insurance protects against a flood. The lender will require this, if during the home loan process, the lender discovers through the Flood Certificatet that the home is located in a flood zone. Note: Not all homeowners policies protect against flooding, so this is why the lender requires it if the home is in a flood zone.
The insurance in question - Mortgage Insurance. Since you have a homeowners policy, and a flood policy (if required), why the need for extra insurance. To start - not all loans require mortgage insurance. Any loan that results in an equity position of 20% or more, does not require Mortgage Insurance. (Essentially, if you buy a home with 20% down or more, 99% of the time the MI will not be necessary - the 1% of the time is if you are using FHA, but that is a story for a different day).
Let's say that the down payment is less than 20%, what happens next. The lender will require Mortgage Insurance.
- Mortgage Insurance is a policy can be defined as follows: An insurance policy that protects a mortgage lender or title holder in the event that the borrower defaults on payments, dies, or is otherwise unable to meet the contractual obligations of the mortgage.
- Mortgage Insurance - protects lender against default when borrower puts less than 20% down towards the purchase
- Borrower pays mortgage insurance monthly as part of the monthly payment
- Once loan reaches 78% LTV based on the Amortization schedule MI automatically is removed (unless FHA loan - then continues for the life of the loan)
- Can get MI up to 97% of LTV on a purchase (so 3% down payment required)
Is Mortgage Insurance a good option? -- In short, yes. When borrowers don't have the full liquidity to put 20% down, but can afford the monthly mortgage payment (including the MI), then Mortgage Insurance can help them begin their purchase process sooner rather than later.
I will explain the difference with FHA mortgage insurance in a different post later this week.