Mortgage Insurance
Mortgage insurance, also known as Personal Mortgage Insurance (PMI) is a policy that protects lenders against some or most of the losses that can occur when a borrower defaults on a mortgage loan. A PMI is required primarily for borrowers with a down payment of less than 20% of the home purchase price. The annual cost of PMI varies and is expressed in terms of the total loan value in most cases, depending on the loan term, loan type, proportion of the total home value that is financed, the coverage amount, and the frequency of premium payments (monthly, annual, or single). The PMI may be payable up front, or it may be capitalized onto the loan in the case of single premium product.
The cost of the PMI varies considerably based on several factors which include loan amount, LTV (loan-to–value ratio), occupancy, primary or secondary home, investment property documentation provided at loan origination and most of all credit score. If a borrower has less than 20% percent down payment needed to avoid a mortgage insurance requirement you might be able to make use of a second mortgage sometimes referred to as (“piggy back loan”) to make up the difference.
This type of insurance is usually required if the down payment is less than 20% of the sales price or appraised value you can eliminate your mortgage insurance through additional principal being paid on the loan, through renovation/upgrade being done to your property where the home value appreciates or both. The cancellation request must come from the Servicer of the mortgage to the mortgage insurance company who issued the insurance. The Servicer will require a new appraisal to determine the LTV.
Personal mortgage insurance has two major advantages. Risks are now assumed by the insurance company rather than the lender which makes the lender more apt to offer a particular loan. Second if you cannot pay the required 20% down payment, homeowner’s mortgage insurance can help reduce that rate significantly so that you can pay as little as 3-5 % up front.
Disadvantages of a PMI would be dealing with added costs. A PMI is added to the existing monthly payment in the form of premiums. That can be a very costly addition when you are already paying substantial monthly payments on the mortgage loan in the first place.
Most people who obtain this type of loan do so out of necessity. Once they find the means to meet the requirements to eliminate the PMI they do so. This means you should accumulate a significant amount of equity in your home or take other measures to meet federal lending requirements.