Mortgage insurance is money that homeowners take out a loan to provide more security for lenders and is typically required for government-backed loans. There is insurance paid by the lender or lender and insurance paid by the borrower, although in any case, despite the name, it is always the borrower who ends up paying.
Private mortgage insurance or “private mortgage insurance” (PMI) is the most popular type of insurance. There is also Lender Paid Mortgage Insurance (LPMI) and Federal Housing Association (FHA) Mortgage Insurance.
In the case of LPMI, the lender covers expenses by setting an interest rate higher than the market rate.
The insurance you will need to obtain will depend on what type of mortgage. Private insurance is paid for by homeowners who took out a conventional loan with a relatively low first payment (less than 20%), while FHA insurance is for FHA-type mortgages.
FHA mortgages are generally easier to get than conventional ones. This explains why FHA and LPMI insurance are more challenging to cancel.
FHA mortgages are easier to obtain because they require a minimum credit score of 580 and a down payment of 3.5% of the property’s value. With credits between 500 and 579, a 10% initial payment is required.
Conventional mortgages generally require credit scores above 620, and the lower the score, the higher the interest to be paid.
As a result, PMI costs are generally lower than FHA. If you have a conditional mortgage, your lender may arrange for mortgage insurance purchased through a private company while FHA mortgage insurance payments are made to FHA.
How is it paid?
In most cases, this private mortgage insurance is paid for in monthly installments, in addition to the mortgage payments, while FHA insurance has a closing-down cost and annual fees (which can be paid monthly).
When can I cancel the payments of this insurance?
As anticipated, FHA and LPMI insurance is much more challenging to cancel. In general, this is not an option, and the principal loan must be paid off or refinanced.
Private insurance for traditional mortgages can be removed once the loan has been paid off at 78% of the house’s original value. In theory, the policy should automatically cancel the payment when 78% is reached.
There was conflict over it during the 1990s as many homeowners didn’t know they could cancel their PMI and paid for much longer than they owed. For this reason, for loans originating after July 29, 1999, the PMI policy must be canceled automatically when it reaches 78% of the payment of the property’s original value.
In which cases is it mandatory? Can I avoid having to pay for this?
The simple answer is: It’s required if you put down less than 20% of the property’s value and the easiest way to avoid having to pay for this insurance is to have a high credit score and put 20% down.
As we mentioned earlier, the good news is that if you don’t have the 20% down payment, there are ways to cancel having to pay this down in the future once you reach 20% or 22% on conventional mortgages and or refinancing if you have FHA or LPMI insurance.
Does paying this insurance bring me any advantage as a buyer?
While purchasing this insurance benefits the lender by protecting them, the advantage to the buyer is that it at least allows them to access the mortgage with a low down payment.
How is it calculated?
- In the case of private mortgage insurance or PMI
The average cost of private mortgage insurance, or PMI, is 0.55% to 2.25% of the original loan per year.
Several websites can do the calculation for you, like Nerdwallet or HSH.
- In the case of FHA insurance, it is estimated that the initial fee must be calculated, which is around 1.75% of the value of the loan, and the annual costs of 0.45% to 1.05% of the loan.
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This article is intended to be helpful and informative, but legal matters can be complicated and stressful. A qualified real estate attorney can address your particular legal needs, explain the law, and represent you in court. Take the first step now, and contact a local real estate attorney to discuss your particular legal situation.