What is a Mortgage Insurance Calculator?
To understand what a Mortgage Insurance Calculator is, it is first necessary to understand what mortgage insurance itself is. Mortgage insurance is an insurance policy taken out and paid for by the borrower to protect the lender in the event that he (the borrower) defaults on the mortgage loan.
Here is an example. Suppose you buy a house for $100,000, but you don’t have $20,000 you can use as a down payment. Maybe you only have $10,000, or even less. The Mortgage Insurance Calculator will show you that you will be required by your lender to purchase a mortgage insurance policy to protect that lender against the possibility that you will default on the loan.
What many people don’t know is that once their level of equity in the home reaches 20% or more, they are no longer required to carry mortgage insurance. Many homeowners have kept right on paying mortgage insurance to protect their lenders even after they are no longer required to.
Borrowers can reach 20% equity in numerous ways. One way is that the value of the house increases due to a hot housing market. Using your Mortgage Insurance Calculator you can determine that if your $100,000 house is later worth $200,000, your mortgage is only for half the appraised value of the house, which is well more than 20% required to get you off the hook for mortgage insurance.
Another way borrowers can pass that “magic” 20% equity mark is to make extra mortgage payments when possible. This is a good idea regardless, but an added incentive is not having to make that mortgage insurance premium once you hit 20% equity as figured by your Mortgage Insurance Calculator.
A law passed in 1998, the Homeowner’s Protection Act, made it so homeowners have the right to request that private mortgage insurance be canceled once you have 20% equity in your mortgage. In addition, it requires lenders to automatically cancel private mortgage insurance when you have 22% equity. This means that even if you still pay mortgage insurance after you have 20% equity, you at least won’t be paying it for years without knowing you don’t need it.
Some homeowners pay for mortgage insurance by getting a second mortgage, or a “piggyback” mortgage on top of the original mortgage. In 2007, a law was passed in the U.S. making mortgage insurance tax deductible on properties purchased on or after January 1, 2007, making such piggyback loans less necessary.
You may want to check out my other guide on global life insurance and small business liability insurance
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