Mortgage Insurance - 101

Private mortgage insurance (PMI) lets buyers obtain a conventional mortgage without a large down payment. PMI protects a lender against monetary loss if a homeowner defaults on a loan and is usually required with a down payment less than 20% of the home value.

If the loan for which you apply for will have Lender-Paid Mortgage insurance (LPMI), it means that:

  • The lender, not you, pays for the mortgage insurance.
  • If the lender cancels LPMI, any refund of premium, if applicable, will be payable to the lender and your monthly loan payment amount may not change.

Mortgage Insurance comparison

LPMI differs from borrower-paid mortgage insurance (BPMI) in a number of ways – having certain advantages and disadvantages, including:


  • Cancellation of Mortgage Insurance
    a.     LPMI cannot be cancelled by you, the borrower. LPMI typically terminates only when the loan is refinanced, paid-off or otherwise terminated.
    b.     BPMI, on the other hand, may be cancelled by borrower request on either:
    1) The date the principal balance of the loan is first scheduled to reach 80% of the original value of the property; or
    2) The date the principal balance actually reaches 80% of the original value of the property
    c.     BPMI may be automatically terminated on the date the principal balance of the loan is first scheduled to reach 78% of the original value of the property.
  • LPMI usually results in the borrower paying greater finance charges, either in the form of a higher interest rate or increased origination points, than would be paid if the loan had BPMI.
  • LPMI may be tax deductible for federal income tax purposes if you itemize deductions on your return. You should consult your tax advisor for details.
  • Both LPMI and BPMI have advantages and disadvantages.


BPMI – Borrower Paid Mortgage Insurance
Only you know what the right solution is for you and your family. The question of renting versus buying, or waiting until you have a substantial down-payment to purchase a home – the decision is yours.

This will explain what mortgage insurance (MI) is, and some of the benefits of having mortgage insurance:

 

Buy your dream home sooner – own a home with as little as 3% down.

Flexible premium payment options are available – your lender can offer several options for MI payment. Premium payments are temporary – MI can be cancelled once your home reaches 80% of its original value. A safety net is in place in times of financial hardship – and the mortgage insurance company can assist a homeowner in working with the lender to keep their home.

Frequently Asked Questions about Mortgage Insurance

  • Won't MI just increase my mortgage payment?

    Won't MI just increase my mortgage payment? 


    Your mortgage payments are determined mainly by the interest rate and the loan amount. Mortgage insurance represents only a very small percentage of your mortgage payment.

  • How much does MI cost?

    How much does MI cost?


    It varies. You’ll need less mortgage insurance with 15% down than you will with 3% down. It also depends on the type of mortgage and other factors. Your lender can provide you with specific payment amounts.

  • Do I have to keep paying for MI for the length of my mortgage?

    Do I have to keep paying for MI for the length of my mortgage?


    No. You may request MI cancellation when your mortgage balance reaches 80% of the home's original or current appraised value. Further, the Federal Homeowners Protection Act requires that mortgage insurance be canceled automatically when the balance reaches 78%. This law may not apply to all mortgages. Your lender can tell you whether your mortgage qualifies.


    At closing, your lender must provide you with written notification that there is mortgage insurance on the loan and that you have a right to cancel under certain conditions. Each year thereafter, your lender must send you a reminder that you have MI and that you can request cancellation once the requirements are met.


    To learn more about cancellation, contact your mortgage servicer.

  • How do I pay for mortgage insurance?

    How do I pay for mortgage insurance?


    You may have several options, ranging from monthly premiums to a single premium financed as part of your mortgage.

  • Why do lenders need protection?

    Why do lenders need protection?


    While MI makes it possible to buy a home sooner, it also protects your bank or lending institution if you’re unable to continue making your mortgage payments.


    Studies have shown that homeowners with less than 20% invested in a home are more likely to default. That makes low-down-payment mortgages riskier for lenders and investors. Mortgage insurance helps cover this additional risk.

I have more questions about MI. Who can I ask? For specifics about available MI products and prices, or to learn more about the home buying process, contact a mortgage lender in your area.


You can also contact a mortgage broker such as Aiello & Associates

Source: Radian