Navigating the Complexities of Mortgage Insurance

When considering a home purchase that involves a lower down payment, you've likely encountered the term "mortgage insurance." However, it is crucial to understand the what, why, and when of mortgage insurance. Also, you need to know how to eliminate it when the time is right.

Exploring Mortgage Insurance

Mortgage insurance (MI) is a policy designed to mitigate the lender's risk in situations where less than 20% of the purchase price is paid as a down payment. It is a prerequisite for conventional loans with less than a 20% down payment and is typically required for FHA and USDA loans. For conventional loans, your lender will facilitate the MI via a private firm. The rates of Private Mortgage Insurance (PMI) differ, contingent on the down payment and your credit score. In general, for consumers with good credit, PMI tends to be cheaper than FHA MI. Payment for PMI is most commonly done monthly. However, options exist where the entire MI can be covered upfront as part of the closing costs, or integrated into the loan amount.

The Purpose of Mortgage Insurance

Private mortgage insurance expedites homeownership for many by enabling lenders to provide loans with substantially lower down payments. It compensates for the lender's risk in a low down payment transaction. Some conventional loan products, with PMI included, permit a down payment as low as 3% of the loan amount. MI should not be mistaken for other standard insurance policies such as homeowners, flood, or earthquake insurance. MI safeguards the lender in case of loan default. If you default on your payments, the MI provides no direct benefit to you as a borrower; your credit score might take a hit, and you risk losing your home to foreclosure.

When is Mortgage Insurance Removed?

Unlike FHA and USDA loans, which often require MI for the loan duration, MI on a conventional loan is removable if you're paying it monthly. MI automatically gets cancelled when your loan balance falls to 78% of your home's original value. The "original value" usually refers to the contract sales price or your home's appraised value at the time of purchase, whichever is lower. You can also proactively request to discontinue the MI before this. However, it's crucial to note that if your MI was an upfront one-time fee or financed into your loan amount, it typically does not cancel, nor is it refundable. Understanding these dynamics with your Mortgage Advisor before opting for an MI policy is essential.

Steps to Remove Mortgage Insurance from My Payment

As stated earlier, your monthly MI will automatically cease when your loan balance hits 78%. However, you have the privilege to request the MI removal once your loan balance reaches 80% of your home's original value. To have your PMI removed, certain criteria must be met:

• Your request must be in written form. We've provided a sample letter for MI cancellation.
• You must have a satisfactory payment history.
• Your payments must be up-to-date.
• Your lender might need you to certify there are no subordinate liens on your home.
• Evidence may be required to show that the property value has not declined below its original value.

A closing disclosure within your loan's paperwork will show the name of your MI company. According to US Mortgage Insurers, six active MI companies are currently operating in the US. Overall, MI can be beneficial, especially for first-time homebuyers who might not have large down payments. It becomes even more advantageous when you comprehend what it is, why it's necessary, and how to eliminate it when needed.

Do you require more information on how mortgage insurance could work for you as part of a lower down payment loan? Complete the form below or reach out to us today!