When
buying a home and shopping for a mortgage, many people will be faced with
some decisions regarding private mortgage insurance (PMI). Common questions include:
·
What
is mortgage insurance?
·
How
much is mortgage insurance?
·
Is
there a way to avoid paying mortgage insurance?
PMI requirements vary by loan type, loan duration and/or
down payment amount. Knowing these four facts can help you make the right
decision and possibly save money each month by avoiding mortgage insurance all together.
1.
Mortgage insurance is for the lender, not for you
Lenders will require mortgage insurance in certain instances —
for example, when you put 5 percent down on a home instead of 20 percent down.
The lender will require that you pay PMI each month, and in the event that you
default on the loan, the mortgage insurance company agrees to an arranged
payout to the lender for its loss.
Mortgage insurance doesn’t
protect you from a loss; it is designed to help protect the lender for any loss
incurred.
2.
Mortgage insurance requirements vary by loan type
Different loan types will
have different mortgage insurance requirements — and some have no
requirements at all. Simple rules of thumb for popular loan programs include:
·
FHA loans: Require mortgage insurance to be paid up front (UFMIP) as
well as monthly (MI) if equity is less than 20 percent.
·
VA
loans: Do not require mortgage insurance.
·
USDA
loans: Do not require mortgage insurance.
·
Conventional
loans: Require mortgage insurance if equity is less than 20 percent.
3.
Lender paid mortgage insurance is an option
In the event that mortgage
insurance is required for the loan program you are interested in and the down
payment you are putting down, some lenders may offer something called “lender
paid mortgage insurance.”
Simply put, the lender
agrees to pay your mortgage insurance in exchange for a slightly higher
interest rate. Normally, when the lender pays the premium it will make a
one-time payment to the mortgage insurance company, not make payments over the
life of the loan.
4.
It’s possible to start with mortgage insurance, then drop it later
It’s common for borrowers
with a 3.5 percent (FHA) or 5 percent (conventional) down payment to initially
have mortgage insurance. At some point, if you keep making your mortgage
payments, you will be in the equity position (20 percent or more) where it will
be possible to stop making mortgage insurance payments altogether.
If you think you are now
in the equity position required to drop PMI, be sure to call your lender, who
will send you information on what is required for your specific loan program to
get rid of mortgage insurance payments. Don’t expect your lender to call you
once you reach a magical equity point: You will need to be proactive and call
your lender.
Its better if you ask your loan
officer lots of questions related to mortgage insurance. It’s very common for a
lender to offer a program with a different option for PMI, and asking questions
can be an easy way to save money.
About the Author: Edward Casey is mortgage expert from Houston Texas. He help a lot of buyers to get the best real estate.