Private Mortgage Insurance On Home Loan

Private Mortgage Insurance

Gustan Cho Associates

Private mortgage insurance on home loan is a mortgage insurance policy that is required by mortgage lenders for mortgage loan borrowers who have conventional loans with 20% or less equity.  FHA loans have mandatory mortgage insurance premium requirements too but on this article, we will discuss private mortgage insurance required by conventional mortgage lenders.

Mortgage loan borrowers need to pay private mortgage insurance on home loan.  However, private mortgage insurance on home loan has no benefits for the mortgage loan borrower and only benefits the mortgage lender.  Private mortgage insurance offers protection to the mortgage lender in the event if the mortgage loan borrower ever defaults on their mortgage and the mortgage loan goes into default.  Many homeowners get confused and think that private mortgage insurance pays for the mortgage loan in the event of the homeowner’s death.  This is not the case.  There is a type of mortgage insurance that covers the homeowner and pays the mortgage loan balance in the event of the homeowner’s death but the premium is not worth it.  Homeowners are better off in getting a life insurance policy where the benefits are sufficient enough to pay off their mortgage loan balance in the event of their death so their spouse or heirs will not be liable for making the mortgage payments.

Why Do Mortgage Lenders Force Borrowers To Pay Private Mortgage Insurance On Home Insurance?

Mortgage loan borrowers do not elect whether or not to have private mortgage insurance coverage.  It is forced upon them by their mortgage lenders in order for the lender to fund the mortgage loan.  Mortgage lenders will make mortgage borrowers to have private mortgage insurance if they put less than a 20% down payment on their home purchase or have an 80% loan to value on their refinance mortgage.  The greater the loan to value, the greater the risk the mortgage lender has.  Mortgage lenders feel comfortable for home buyers who put down 20% or more in down payment so for those mortgage loan borrowers, they do not require private mortgage insurance.  The less money the home buyer puts down on his or her home purchase, the greater the risk the mortgage lender has and that is why private mortgage insurance is required for home buyers putting a down payment of less than 20% down payment.  The bottom line is that the mortgage lender wants to insure the mortgage loan they have funded against default and minimize their losses in the event if the property forecloses.

Who Picks Private Mortgage Insurance Company On Home Loan?

Unfortunately, you have no say so on which private mortgage insurance company the mortgage lender will select to be your private mortgage insurance carrier nor can you negotiate the premiums.  The mortgage lender has a select group of private mortgage insurance companies they deal with and your [rivate mortgage insurance premiums depends on your risk factors such as how much money you are putting down, your credit scores, your credit history, and your debt to income ratios.

The way private mortgage insurance works is if you put a 5% down payment on your home and in the event if you ever default on your mortgage loan and the home goes into foreclosure, the private mortgage insurance company will pay up to 15% to the mortgage lender against their losses.  For example, if you purchased a $100,000 home and put 5% down payment ( $5,000 ) and you stopped making payments and the home went into foreclosure and the home sold for $75,000 at the sheriff’s sale, the private mortgage insurance company will insure up to 80% of the loan to value of the your home’s original purchase price of $100,000.  You put $5,000 down payment.  80% of the total original purchase price is $100,000.  Total loss value of $20,000.  $15,000 is the amount the private mortgage insurance company is liable for.

Can I Cancel My Private Mortgage Insurance On Home Loan?

If you had a FHA loan, you would get charged a one time upfront mortgage insurance premium of 1.75% of the mortgage balance and a lifetime 1.35% annual mortgage insurance premium ( divided by 12 monthly payments and escrowed ) for the life of the life of the FHA loan.  However, the good news with conventional loan private mortgage insurance premium is that if your equity in your home rises over the 20% mark either through appreciation of your property or you paying down the existing mortgage loan balance, you will be eligible to cancel your private mortgage insurance by contacting your mortgage lender and making them aware of this fact.

The mortgage lender will most likely order an appraisal which you will need to pay for.  You have no say so on which appraiser to use.  The mortgage lender will choose an appraisal company through the use of an Appraisal Management Company.  If the appraisal states that your home value has at least 20% equity, you will be able to cancel your private mortgage insurance premium forever.

Are There Ways Of Avoiding To Pay Private Mortgage Insurance On Home Loan?

There are options of avoiding to pay private mortgage insurance.  The first most obvious option is to put a 20% down payment.  Unfortunately, many home buyers, especially first time home buyers, do not have the 20% down payment to put down on their home purchase.  There is another conventional mortgage loan program called Lender Paid Mortgage Insurance, also referred to LPMI.  Lender Paid Mortgage Insurance is when there is no mortgage insurance required to be paid by the borrower and the mortgage lender covers the private mortgage insurance on their part.  Nothing is free in this world and someone needs to pay for this.  It will be you the borrower that will pay for the LPMI.  In lieu of a slightly higher rate, you can choose the Lender Paid Mortgage Insurance conventional loan program instead of paying separate private mortgage insurance.  You will need to discuss the pros and cons which program better suits you:  Whether it is paying private mortgage insurance separately or not paying mortgage insurance and going with the Lender Paid Mortgage Insurance program.

You can also explore the option of going with a 80/10/10 where you get a first mortgage of 80% loan to value and get a second mortgage of 10% and you put a 10% down payment.  Most second mortgage lenders expect a minimum credit score of 720 FICO in order to extend a second mortgage for this type of loan program.

VA Loans do not require private mortgage insurance so if you are a veteran and are eligible for a VA loan, you can explore going the VA route.

HomePath mortgage loans do not require private mortgage insurance on home loan, however, HomePath mortgage rates are much higher than standard conventional mortgage rates.

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The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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