What to Know About Mortgage Insurance

It is essential that you know what Mortgage insurance is and how it works if you are making a down payment that is not up to 20 percent.  Private Mortgage Insurance (PMI) is not only meant for people who cannot afford 20 percent, but it is also for people who are not willing to put down the 20 percent so that they can have enough funds for remodeling, repairs, furnishing, and emergencies.

What is Private Mortgage Insurance (PMI)?

You should know that most lenders demand a PMI if a homebuyer is making a down payment that is not up to 20 percent of the price of the home.  In Mortgage terms, if the Loan-to-Value is more than 80 percent, a PMI will be required. Buyers are to note that the risk profile of a mortgage increases with increase in LTV.

Private mortgage insurance allows a borrower to obtain financing if they prefer or can only afford 5 percent to 19.99 percent of the apartment cost. However, PMI comes with an extra monthly cost.  Borrowers are expected to pay their Private Mortgage insurance until they have accumulated enough equity in the home such that the lender no longer considers them as risky.

How Long Do You Carry PMI?

Borrowers can stop the monthly insurance payment once they have attained the loan-to-value ratio that is below 80 percent.  Once you achieve an LTV of 78 percent, that is, the principal you have paid off plus the down payment equals 22 percent, the lender should cancel PMI automatically as stated by the federal Homeowners Protection Act.

Types of Private Mortgage Insurance

There are five types of mortgage insurance, and four of these fall under the private mortgage insurance while the last one applies when you put down less than 20 percent on a mortgage insured by the Federal Housing. The four types of private mortgage insurance are as follows:

  • Borrowers –Paid Mortgage Insurance

This type of Private mortgage insurance comes in the form of an extra monthly fee that goes with your mortgage payment.

  • Single- Premium Mortgage Insurance

Single-Premium Mortgage Insurance is also known as single-payment mortgage insurance. This type of PMI involves upfront payment in a lump sum, either financed into a mortgage or in full at closing.

  • Lender-Paid Mortgage Insurance

The lender-paid Mortgage insurance is an option that allows your lender to pay the mortgage insurance premium technically.  You will pay lender-paid Mortgage insurance over the entire life of a loan.

  • Split-Premium Mortgage Insurance

The split-premium mortgage is the best type of PMI. This type of private mortgage insurance is the hybrid of Borrower-paid mortgage insurance and single-premium mortgage insurance.

Learn more about Private mortgage insurance and let a qualified mortgage office in your neighborhood recommend a great one for you before closing your mortgage.