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Mortgage Insurance - Home Owner Insurance

Although there are many items that must be paid for as part of the closing of a loan, many people are surprised that one of the closing costs often tacked onto a home mortgage is mortgage insurance, also called hazard insurance, home owner insurance or just HOI.  Since they have already arranged for homeowner's insurance, they may not understand what mortgage insurance is and how it works. 


First of all, mortgage insurances do not protect you, but instead are insurance policies that protect the lender in case you default on the loan.  This is usually paid to a private insurance company.  Because a mortgage is often in the vicinity of hundreds of thousands of dollars, if there were no insurance to back it up the lender would lose a tremendous amount of money when a borrower stops paying on the loan.  The lender charges the borrower the cost of this insurance so that lending the money is not as risky.  This insurance allows the lender to offer low rates to the borrower who needs the home loan. 


While you may often see an amount for mortgage insurance as part of the closing costs, you will be even more likely to see it on the Good Faith Estimate or Truth-in-Lending documents.  The reason for this is that you will be making a monthly payment toward this insurance policy each month when you make your mortgage payment.  In other words, it will be added to your loan on a monthly basis.  It is good to know that this does not go on forever.  Once the amount of your loan is less than 80% of the value of your home, you can usually drop the mortgage insurance.  Often, when you do mortgage refinancing on your home you will have to continue paying this insurance unless your home's value has increased enough to make your total mortgage refinance less than 80% of the value of the home. 


For people who are looking at bad credit mortgage loans, home owner insurance will be needed unless they make a 20% down payment on the initial loan.  As you can see, it doesn't matter what kind of loan product you get, you may be required to pay for the additional mortgage insurance in order to get the loan.  The rates for mortgage insurance premiums tend to vary from one lender to the next, so it is a good idea to shop around for the lowest rate if you think you will end up paying mortgage insurance.  If you can make a large enough down payment, you won't have to deal with mortgage insurance at all.