What Is Mortgage Insurance Premium?
Mortgage Insurance Premium Explained:
Mortgage insurance premium is a form of insurance that has no benefits to the mortgage loan borrower and benefits the mortgage lender in the case of a mortgage default. Mortgage Insurance Premium is paid for the borrower to benefit the mortgage lender in the event the borrower defaults on their loan. Anyone who puts down less than a 20% down payment is required to have private mortgage insurance on a conventional loan. FHA has mandatory mortgage insurance premium required which is called mortgage insurance premium for the life of a FHA loan. FHA also requires a one time upfront mortgage insurance premium of 1.75% of the mortgage balance amount and this upfront mortgage insurance premium can be rolled into the balance of the mortgage loan.
Is Mortgage Insurance Premium Mandatory?
Mortgage lenders require that all borrowers who put down less than 20% downpayment on their home purchase require that they have mortgage insurance. The reason being is because the less downpayment a home loan borrower puts down, the riskier the borrower is because they do not have skin in the game. Mortgage lenders feel secure if borrowers put 20% or more down payment on their home purchase. However, most home buyers do not have the 20% downpayment to put down on a home purchase. The way private mortgage insurance works is that if a mortgage loan borrower defaults on their home loan, the mortgage insurance company will cover the mortgage lender up to 20% of the loss. For example, if a home buyer purchased a $100,000 home and put 5% or $5,000 downpayment, and defaults on their mortgage loan of $95,000, the mortgage insurance company will cover the home loan borrower’s mortgage lender up to 15%, 80% loan to value. The coverage will get covered by the private mortgage company after the home has been foreclosed to determined the actual loss the mortgage lender took.
Can Mortgage Insurance Premium Be Cancelled?
For FHA, mortgage insurance premium is mandatory for the life of a 30 year fixed FHA loan. You cannot cancel or get rid of the FHA mortgage insurance premium on a FHA loan, no matter how low your loan to value is. The only way to get rid of your mortgage insurance premium on a FHA loan is by refinancing your FHA loan to a conventional loan or by paying off your FHA loan. For 15 year fixed FHA loans, the FHA mortgage loan borrower can cancel the FHA mortgage insurance premium after 11 years if they have a loan to value of less than 78% LTV.
For conventional loans, you can cancel the private mortgage insurance once the homeowner’s equity rises higher than 20%. This rise in equity can be by the home appreciating or by paying down the mortgage balance to meet the 80% loan to value mark. An appraisal will be required if the homeowner thinks that their home appreciated in value. The appraiser needs to be chosen by the mortgage lender through an appraisal management company. A homeowner has no say on which appraiser or appraisal company to use. Appraisals cost between $400 and $600 depending on the region and state.
Avoiding Mortgage Insurance Premium
You can avoid paying mortgage insurance if you can put at least 20% downpayment. You can also explore other mortgage loan programs such as taking out a VA loan if you are an eligible veteran with a Certificate of Eligibility by the Veterans Administration. You can also ask your mortgage lender about the Lender Paid Mortgage Insurance Program, also known as LPMI, which for a slightly higher rate, the mortgage lender will not require mortgage insurance from the mortgage loan borrower and will cover the mortgage insurance. Other conventional mortgage lender offer the upfront mortgage insurance program which by paying upfront points, the mortgage insurance will be covered upfront and no private mortgage insurance is required. Mortgage loan borrowers can also see if they can get a 80/10/10 program where they get a 80% loan to value first mortgage, a 10% second mortgage, and put 10% downpayment. Another possibility is to purchase a Fannie Mae HomePath property and see if the borrower qualifies for a Fannie Mae HomePath mortgage loan. A Fannie Mae HomePath loan requires no mortgage insurance but mortgage rates on a Fannie Mae HomePath loan is normally 0.50% higher than a comparable conventional mortgage loan.
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