Mortgage Insurance Cost

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Of late, many of the investors are leveraging on mortgage insurance cost by trading it in secondary markets. The mortgage insurance cost is determined by the mortgage insurance broker. The main function of these Indian mortgage insurance brokers is to broker mortgage loans against a valid insurance product of the mortgage borrower.

They spot and facilitate the mortgage borrower with mortgage loan against valid insurance. The quantum of the mortgage loan that can be facilitated to the mortgage borrower is determined in accordance with the maturity value or sum assured of the insurance product of the mortgage borrower. Generally, an interest rate of mortgage loan value, which is lower than the rate of interest paid by the insurance companies is selected. The difference of interest earned and interest paid by the mortgage borrower is the income of the mortgage insurance broker. If the mortgage broker selects a mortgage interest rate higher than the interest paid by the insurance provider of the mortgage borrower, then the mortgage loaner ends up paying money from his own pocket.

The need for mortgage insurance in India cropped up due to huge defaults in mortgage loan repayment. In other words, the rising number of mortgage loan defaulters necessitated the introduction of mortgage insurance product in India. Further, high mortgage loan value is another factor which also added to the cause. With rising real estate price in urban India the buyer finds it difficult to finance the high cost of residential house or flat. Home loan finance or home mortgage becomes a viable option for ownership of property. The home loan facilitator or the Indian home finance companies are in a catch twenty two situation, with rising number of customer and rising number of mortgage loan repayment defaulter. To negate this problem the concept of private mortgage insurance cropped up and subsequently necessitated accurate determination of mortgage insurance cost.

The mortgage insurance actually hedges the risk of the mortgage loan facilitator against any default of mortgage loan repayment by the mortgage borrower. The lender of the loan mortgage extends the loan against a valid insurance of the mortgage borrower. The insurance so accepted as collateral is further invested in the secondary market by the mortgage loan facilitator but the premia are being paid by the mortgage loan borrower. These insurance premia are generally very high and generally bear moderate risk quotient. Moreover, all the risk associated with the trading of the mortgaged insurance of the mortgage loan borrower is being borne by the mortgage loan borrower himself and not by the mortgage loan facilitator or the mortgage loaner.

In case of any fall in the value of the mortgaged insurance that is being traded in the secondary market the whole loss is being passed on to the mortgage loan borrower and the mortgage loaner ends up with zero earning. Thus, the process of valuation of the mortgaged property against the mortgaged insurance of the mortgage borrower is of extreme importance and needs high class professional expertise. A slight error in calculation of mortgage insurance cost can jeopardize the position of the mortgage loan borrower and the mortgage loaner. In such an undesired situation the mortgage loan borrower becomes completely bankrupt and eventually loses his ownership of the property.

Two types of mortgage financing rates are prevalent in the Indian mortgage market and they are as follows -
  • Fixed Mortgage Rate - in this case the rate of interest remains fixed throughout the loan term. The mortgage rates do not vary according to market conditions. In other words, the rate of interest is pre-fixed during the process of borrowing and it generally varies between 12.5%-25 %.

  • Flexible Mortgage Rate - is one in which the interest rate varies according to market movements. This type of interest rate is called 'adjusting' or 'floating' rates. The risk factor is high in this type of interest rates.
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  • Last Updated on 5/26/2011