Mortgage Insurance: What Is It? When Do I Have To Have It? When Can I Stop Paying Mortgage Insurance?
What Is It? Private Mortgage insurance (PMI) is a financial guaranty for Conforming loan lenders that
helps reduce or eliminate loss in the case of a default by the borrower.
(MIP is “mortgage insurance premium” and only charged on FHA loans. Learn more about FHA’s MIP
by clicking here.)
When Do I Have To Have It? Private Mortgage Insurance is almost universally required on loans
where the borrower has less than 20% equity. That means if you are purchasing a home with less
than 20% down or refinancing to more than 80% of your home’s value, you are going to be required
to pay mortgage insurance.
Why Do I Have To Have It? It’s all about risk. A bank does not want to have more than an
80% interest in a property because they have to plan for worst case scenario – foreclosure.
The legal costs related to foreclosure combined with the loss that will be incurred trying to
sell the property at auction for less than market value have established the 80% safety mark
for most all banks in the U.S. And since most people do not have 20% down to buy their first
homes, the insurance industry created a product that allows these borrowers to purchase an
insurance policy that will cover the shortage between their down payment and the 20% needed.
Without mortgage insurance, many lenders would not be willing to accept the risk of lending to
a borrower that did not have at least 20% equity or down payment. This would make it significantly
more difficult for customers to purchase a home, or use their home equity to consolidate debt, or
make home improvements. So while mortgage insurance may be spoken of with disdain by most borrowers,
it is often the factor that has allowed many of us to gain approval for our loan.
(A bill was passed
in 2007 that allows tax deductibility of mortgage insurance, just like we have for the mortgage
interest that we pay. There are income restrictions on this provision, so check with a tax
professional to see if this would benefit you.)
When Can I Stop Paying Mortgage Insurance? There are 3 ways to drop your mortgage insurance on your home:
- Refinance to another mortgage without mortgage insurance
- Petition your loan servicer to remove the mortgage insurance
- Automatic termination of mortgage insurance once you have at least 78% equity in the home
The surest way to get rid of your mortgage insurance is to refinance to another loan that does not
have mortgage insurance. That may not be the most economical method, but is the surest. Often
borrowers have an FHA loan that has monthly mortgage insurance that can be eliminated if they either
refinance to a Conventional loan or combine a Conventional loan with a small 2nd mortgage.
The next way to drop your insurance is to petition your loan servicer to remove the mortgage insurance.
Your home’s appraised value would have to establish a 20% equity position between what it is worth,
and what is currently owed. They will also require a market appraisal be performed at your cost, which
can run between $350 – $550. Most will also require that the borrower has made all payments on-time as
agreed for a specified length of time, and that the mortgage is current at the time of the request.
The third way to drop mortgage insurance is by automatic termination of mortgage insurance.
Once you have at least 78% equity in the home, Conventional lenders are required to cancel the
mortgage insurance, per the Homeowner Protection Act of 1998. But how is this calculated? For
automatic termination of the mortgage insurance, the current amount owed is compared to the original
value of the property, and when that ratio is 78% or less, the lender must remove mortgage insurance.
Unfortunately, this does not take into account any of the property’s appreciation throughout the years,
and you may save more money by refinancing long before this threshold is reached.
If you currently pay mortgage insurance, it would be wise to contact one of our Loan Specialists
at Churchill Mortgage to see if you could save money by refinancing.
Or Call us at 1-888-562-6200 and speak with a representative today!