Mortgage insurance is designed to protect us against loss in the event that you default on your loan. When a borrower defaults and we take title, mortgage insurance reduces or eliminates their costs. In many cases, mortgage insurance is required on loans if the down payment is less than 20 percent.
There are many types of mortgage insurance. The most common is called private mortgage insurance, or PMI, and it is required on most conventional loans when the down payment is less than 20 percent. FHA loans also have mortgage insurance in the form of an annual premium (charged monthly and added to the mortgage payment) and an upfront premium.
Mortgage insurance is almost always paid by the borrower.
If you are getting a conventional loan with a loan-to-value (LTV) ratio of more than 80 percent (you put down less than 20 percent), you will need private mortgage insurance (PMI). You can also be required to carry PMI if you have a low credit score or are otherwise seen as high risk, regardless of your LTV.
Private mortgage insurance (PMI) is most often a percentage of your loan. The higher the LTV ratio, the higher the PMI.
With an FHA loan, you will pay an upfront mortgage insurance premium (MIP) of 1.75 percent. There is also an annual premium of 0.70 to 1.30 percent.
Several years ago, FHA mortgage insurance premiums would drop off the loan after five years or obtaining a certain LTV. Now, mortgage insurance will remain for the life of the loan and can only be removed by refinancing into a conventional loan. You would need to prove by an appraisal that your equity exceeds the 20% needed.
PMI is much easier to get rid of, as it can drop off once you have at least 20 percent equity in your home. You can reach this through home appreciation or paying down your loan. We will require proof in the form of an appraisal, which may cost $350 to $500. We must cancel your PMI if your balance hits 78 percent LTV.
Think of mortgage insurance as a necessary cost to getting a loan if you cannot put down a significant down payment. Still, make sure you know whether it is possible to cancel your mortgage insurance and how to do so.
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