Understanding the Basics of Mortgage Insurance

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In any mortgage situation, both the lender and borrower have to be protected. And within the latter realm, one of the more common elements of many mortgages is something called mortgage insurance.

At VIP Mortgage Inc., we can help you understand which of our loan types might require mortgage insurance, and what the reasoning for this is. Here are all the basic details you need to know about this element before you consider mortgages or mortgage rates.

Basics and Benefits

Mortgage insurance is one way of protecting the lender against the risk of default on the loan from the borrower. Defaults include lack of payment for a few reasons, from death to job loss or medical bills. Mortgage insurance can be provided from a couple different sources. In many cases, it will be sourced from a private mortgage insurance company (referred to as PMI), and in others it will be backed by a government agency like the VA or FHA.

In this latter case, mortgage insurance is often a direct benefit you as a buyer. It allows you to purchase the home with a much smaller down payment and often a lower credit score than would otherwise be required, usually as part of the FHA loan program. In return, you pay this insurance over time.

Payment Options

There are several options when it comes to paying your mortgage insurance:

  • Monthly: There’s no upfront premium here, and this form can be canceled. It’s generally folded in to your monthly mortgage payment.
  • Single: You pay a premium upfront and cover the entire balance in one shot. This format may or may not be refundable, and might be paid by the seller or homebuilder in some cases. In cases where it’s paid by the borrower, it’s usually financed into the loan amount.
  • Split: A combination of the two above options, with an upfront premium paid but also a lower monthly renewal amount paid.
  • Lender-paid: In certain cases, the lender or a separate party will pay the mortgage insurance via higher interest rates or fees.

Cancelling PMI

It’s important to note that when you’ve built up enough equity in the home – thereby relieving some of the risk on your lender – private mortgage insurance can be cancelled. When you’ve paid your loan balance to the point where it is down to 80 percent of the home’s original value, you’re eligible to apply for cancellation. When this balance reaches 78 percent, the servicer is actually required to eliminate the PMI.

There are also additional situations where PMI can be cancelled based on age of the loan, payment histories, written requests and evidence the property has not declined in value.

For more on mortgage insurance and what it means for you, or to learn about any of our mortgage loan services, speak to the staff at VIP Mortgage Inc. today.

*The views and opinions expressed are my own and do not necessarily represent the official policy or position of Primary Residential Mortgage, Inc.

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