Prevent a lack of capital or a less than perfect credit score from delaying your home purchase. Knowing how mortgage insurance can benefit you will help you increase your buying power and quickly close on your new home.
homediggidy.com covers all topics surrounding home ownership, and gathered the following information to help you understand mortgage insurance, its cost, and how long you need to keep it.
What Is Mortgage Insurance and How Does it Work
Mortgage Insurance is a public or private insurance policy (depends on the insurer and separate from a homeowner’s insurance policy) that compensates lenders or investors for financial losses due to a defaulted mortgage loan.
If a borrower defaults on his/her mortgage, the lender may foreclose on the loan and sell the home. Mortgage insurance covers all or part of the shortfall between the lender’s proceeds from the home’s sale and the borrower’s unpaid loan amount.
Note: Mortgage insurance, no matter the type, shields the lender – not you – if you fall behind or cease to make your mortgage payments. If you fall behind, your credit score may be adversely affected, and you may lose your home through foreclosure.
Who Pays for Mortgage Insurance and How Long Before Removal
Your lender will make payment(s) to your mortgage insurance company, then pass that cost on to you, the borrower. Under normal circumstances, a portion of the mortgage insurance premium is paid upfront at closing. The remainder will be included in the monthly mortgage payments.
Once your loan balance has reached an 80/20 Loan-to-Value (LTV) point, you should contact your mortgage servicer and request that the mortgage insurance be removed. You may be able to speed up this process by sending a PMI cancellation letter to your lender. In addition to possibly setting up an appraisal, they’ll have to verify your home value as well.
Note: The Homeowners Protection Act (or PMI Cancellation Act) requires mortgage lenders to eliminate PMI when the balance on your loan drops to 78%. (the lender may request an appraisal to confirm your home’s LTV.)
What Are Benefits of Mortgage Insurance
While the overall benefits of mortgage insurance may seem lopsided towards the insurer, there are some exciting benefits for the borrower. These benefits include:
Reduced Risk to The Lender – When your risk factor (in the eyes of the lender) is reduced, you can typically qualify for increased loan amounts that were otherwise unattainable.
Reduced Down Payment – Acquiring mortgage insurance can help you by reducing the amount you may be required to apply to your down payment.
Increased Cashflow – While mortgage insurance increases the cost of your loan, it allows you to retain more cash at the time of closing. These funds can then be directed towards moving expenses, home repairs, improvements, or upgrades.
Faster Approval Time – Loans with mortgage insurance are usually approved faster than other non-insured loans.
Note: Depending on the amount of your private loan and your down payment, you may not be required to acquire mortgage insurance. However, all Federal Housing Administration (FHA) loans must be protected by FHA mortgage insurance.
What Is Private Mortgage Insurance
Private mortgage insurance (PMI) is a type of mortgage insurance you may be required to acquire and pay for if you qualify for and take out a conventional loan. Like other mortgage insurance, PMI protects the lender – not you – if you fall behind or stop making payments on your loan. Consider the following:
- Paying a monthly premium is the more common way to pay for PMI
- A one-time up-front premium can sometimes be paid at closing
- And sometimes you can pay for PMI with both up-front and monthly premiums
Like other mortgage insurance types, PMI can help you qualify for a loan that otherwise might not be made available to you. Often, PMI increases the cost of your loan. And for all of its benefits, PMI doesn’t protect you if you run into financial hardships on your mortgage—it only protects the lender.
Mortgage Insurance and FHA
The Federal Housing Administration (FHA) administers a loan insurance program to greatly expand homeownership opportunities. The FHA provides mortgage insurance to FHA-approved lenders to protect them against losses if the borrower ceases to make payments, defaulting on the loan.
The cost of mortgage insurance is passed down to the borrower. It is worth mentioning that standards for qualifying for FHA loans are generally more flexible or relaxed than those for conventional loans.
The FHA is a part of the United States Department of Housing and Urban Development (HUD). Learn more about FHA loan programs, including whether you might qualify for one by visiting hud.gov/buying/loans, calling HUD at (800) 225-5342, or by visiting govloans.gov
How Much Does Mortgage Insurance Cost
The majority of mortgage insurance premiums will cost between 0.5% to 5% of the original mortgage loan amount per year. Observe the following:
- The greater your down payment, the lower your loan value will be
- A high enough down payment may allow you to forego mortgage insurance
- Your credit score (creditworthiness) can impact the cost of your insurance
This means if $100,000 was borrowed and the annual premiums cost 3%, the borrower would have to pay $3,000 each year ($250 per month) to insure the mortgage.
Mortgage Insurance Financing and Payment Options
There are multiple ways to pay for mortgage insurance, including the following:
Financed Mortgage Insurance – All or a portion of the mortgage insurance premium (split and single-premium options) is included in the total loan amount.
One-time Premium Payment – A one-time up-front premium can sometimes be paid at closing.
Up-front and Monthly Premiums – And sometimes you can pay for PMI with both up-front and monthly premiums.
Monthly Premiums – Paying a recurring monthly premium is the more common way to pay for mortgage insurance.
Note: Depending on your qualifications, down payment, loan amount, and mortgage insurance provider, there may be other financing and payment requirements to be met before closing.
How To Get Rid of Mortgage Insurance
In many cases, you may be able to drop your mortgage insurance before your loan reaches full-term. Consider this:
The FHA will typically prevent you from canceling your monthly MI payments unless you put down 10% or more when you received the loan. And even then, you will need to wait for the full term of the loan or 11 years (whichever comes first) before you can cancel the insurance coverage.
Private Mortgage Insurance must be automatically canceled once the loan has reached a specific LTV (typically 80/20%), then the borrower can request to have it canceled. Most lenders will allow for a new home appraisal to determine if you can cancel your MI, reducing your monthly payments.
Note: Borrowers can stop paying their MI if they sell their home, refinance into a new loan without FHA MI, or pay off their existing loan balance.
Mortgage Insurance Types and Benefits
In this article, you discovered what mortgage insurance is, who it protects, what it costs, and some of the benefits you get from having it.
Acquiring mortgage insurance when getting a loan increases your buying power, reduces approval/closing time, and can benefit you by helping you retain more cashflow upfront.
Trying to close on a home without mortgage insurance can be extremely costly, as you may be required to make a much higher down payment for your home.