All About Mortgage Insurance
When many of us think of the American dream, it includes owning our own home. But before World War II, less than 45% of Americans owned a house and, in some states, less than 1 in 3 people were homeowners. But fast-forward to the Year 2000 and more than 65% of Americans own a home, with places like West Virginia touting 3 out of 4 of its citizens as home owners. What could cause such a jump? It’s not just the success of the American economy in the post-war boom; there was also a little innovation in lending called private mortgage insurance.
Here’s a primer on this important tool that has given so many families the opportunity to own their own home.
The Two Types of Mortgage Insurance
Mortgage insurance comes in two varieties. The first is fairly easy to explain, as it’s essentially a life insurance program that allows your mortgage to be paid in full if something happens that prevents you from making the payments. This coverage exists outside of the mortgage loan process from your lender.
The second type of mortgage insurance requires quite a bit more in terms of explanations. But here are the basics:
- Mortgage insurance was developed to give people with a down payment that’s less than 20% of the purchase price the ability to buy a new home
- The mortgage insurance also protects the lender from borrower default. If you stop making the agreed-upon payments and your house goes into foreclosure, the lender can make a claim with the mortgage insurer to recoup their loss.
- Depending on the specific type of loan, mortgage insurance may have a different name, though the products are similary. With most conventional loans, you’ll find it referred to as PMI, or private mortgage insurance. With government-backed loans, like the FHA or USDA, you’ll commonly see MIP or mortgage insurance premium. VA loans require what they call a ‘funding fee’ for similar purposes.
What if I don’t want to pay Mortgage Insurance?
- Though uncommon, borrowers with exceptional credit that are willing to pay a higher loan rate may obtain a loan with no mortgage insurance.
- The ‘easiest’ way to avoid mortgage insurance is to make a down payment of 20% of the purchase price for your new home.
How do I get rid of Mortgage Insurance?
- Once your loan balance is at 78% LTV of the original sales price or appraised value (whichever was lower), reach out to your mortgage servicer to have your insurance cancelled. If you’d like to accelerate this process, consider paying more towards your mortgage on a regular basis.
- If you believe your house has increased in value to such a degree that would get you past the 78% threshold, you can request an appraisal from your loan servicer. You’ll pay the cost of the appraisal and the final decision will rest with the lender, based on their re-assessment of risk following the new appraisal.
If my loan is backed by the government, why do I need mortgage insurance?
- Each government loan has its own stipulations when it comes to mortgage insurance. When it comes to FHA loans, since borrowers in this program are only putting 3.5% down, the lender has opened themselves up to greater risk, leading to both an upfront fee and a monthly fee that typically lasts for the life of the loan. Speak to an FHA-specific lender for more information on this.
- With the VA, there’s only the one-time “funding fee” I mentioned above. The amount of the fee is determined by veteran or active duty status and can be found on a chart maintained by the VA.
- For USDA loans, there’s a monthly fee and an upfront fee; however, the upfront fee is generally financed into the loan amount.
Historically speaking, mortgage insurance is a really great tool, allowing the gift of home ownership to so many more people who would have otherwise been left waiting to save up 20% of the purchase price or counting on a gift from a family member.
Are you looking into buying a home, but don’t really know where to start? Perhaps you’ve owned your home for awhile, but didn’t really understand the process the last time through. No matter what stage you are at in your home buying process, it helps to have someone you can trust and helping you find the right answers. If you’d like to get together and talk mortgages, we’d love to hear from you. Give us a call at 804-274-1200 or send us a message via email: [email protected]. If you got value from this post, please share it with a friend who you think could benefit from it as well. Thanks for reading.
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February 22, 2018
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