Mortgage insurance, called private mortgage insurance or "PMI" for short, is a necessary expense for most homeowners. Without mortgage insurance, it may be next to impossible for buyers to obtain a mortgage without laying out a down payment of 20 percent or more. Although as the buyer you generally have the privilege of paying an insurance premium that benefits the bank, in return you'll be able to conserve cash for other uses and get into a home you might not be able to purchase otherwise.
About Mortgage Insurance
Mortgage insurance is a required by the lender of your mortgage. If the homeowner defaults, mortgage insurance helps to offset the lender's loss, but unfortunately does not benefit the mortgagee as far as saving the home. In most cases, mortgage insurance is required for mortgages with less than 20 percent equity or when refinancing more than 80 percent of the property's value. Mortgage insurance is paid by you, the buyer, and is generally rolled into your total mortgage payment.
Why You Need Mortgage Insurance
Most lenders are not willing or capable of accepting the risk of holding a mortgage that may potentially default, so mortgage insurance actually helps you in the approval process by allaying the lender's fear of default. If it wasn't for mortgage insurance, it would be pretty difficult to talk any lender into giving you a mortgage. As an additional benefit to the homeowner paying the insurance premium, you may be able to write off the mortgage insurance payment on your taxes.
When Mortgage Insurance Is Not Necessary
If you put more than 20 percent down on your home, mortgage insurance may not be required. As time goes on and your equity increases beyond the magic 20 percent or so, you may write the lender and request removal of the mortgage insurance. Depending on the terms of your mortgage, if your home increases in value and your mortgage balance is around 80 percent or lower of the appraised value (of course you may be required to hire and pay for an appraiser) the lender may allow the insurance to be lifted. For FHA guaranteed loans, you will generally be required to pay for mortgage insurance for at least five years regardless of the home's value and equity. Your mortgage terms may differ, so check with your lender for details or hire a real estate attorney.
Homeowner's Protection Act
Your right to cancel mortgage insurance is ensured under the Homeowner's Protection Act of 1998 for loans originating after July 29, 1999. The Act also requires lenders to terminate insurance when the loan to value (LTV) reaches 78 percent as long as the loan is current, a solid payment history has been exhibited or at the mid-point term of the loan. For loans before July 29, 1999, rules will vary from lender-to-lender and state-to-state, so it may be beneficial to contact your lender or real estate attorney for details on mortgage insurance removal for older mortgages.
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