What is Mortgage Insurance?
Welcome friends, I’m going to argue in favor of Mortgage Insurance as an option. Mortgage Insurance is known as mortgage guarantee and home-loan insurance. Yeah, bring out the pitchforks. But, hey, maybe you don’t know what it is. Mortgage insurance, or MI, is one of those costs that many homebuyers have to (and hate to) pay, but what is Mortgage Insurance, and why is it being charged? it is insurance for the lender, not for the borrower.
In most cases, this monthly cost is added to loans when the down payment amount is lower than 20%. This is because when the down payment is that low if a borrower goes into default the lender is unlikely to have enough equity in the home to make money back on their investment, which makes giving the loan in the first place a bigger risk for them.
Many homebuyers face this cost because they often don’t have the liquid funds to pay 20% of a home’s value upfront, and if they arent selling a home they don’t have that Equity to apply to a mortgage. In that situation, there isn’t much to be done about Mortgage Insurance. On conventional loans, you’ll hear MI referred to as PMI, or private MI because the insurance is through a company and not the government.
Basics introduction of MI (Mortgage Insurance):
It is possible for private MI to stop being a factor at some point in the loan. Once you pay enough payments on time for your loan amount to reach 78% of your home’s original value, your PMI should stop being charged. It’s important to understand how this works though – this 78% is based on your original payment schedule. If you pay extra on your mortgage to pay down the principal faster won’t change the date that this PMI will fall off on its own.
However, once your loan is at 80% of your home’s original value your lender may drop the PMI, but you will have to contact them to get that started. One note on all of this though: if you haven’t maintained good payment status neither of these options is going to work. Speaking of PMI, another term you might hear LPMI, which means Lender Paid MI.
You will often hear this on advertisements that mention LPMI as a way of getting out of paying MI, even on loans with 5 or 10 percent down.
LPMI will often result in a lower monthly payment, but the money is coming from somewhere. Loans with LPMI almost always have a higher interest rate to help pay for the cost, so make sure you ask how the LPMI is being paid. Mortgage insurance is also a part of the cost of both FHA and USDA government loans.
On these loans, the mortgage insurance that borrowers pay goes into supporting the FHA and USDA loan programs so that more people can take advantage of their low rates and low down payments. USDA’s MI will never come off the loan, and FHA’s only comes off under very specific circumstances.
As a quick note, VA loans don’t have Mortgage Insurance, no matter what. Without MI as an option, lenders might just pass over people who have less money to spend upfront. It simply isn’t going to be financially viable for everyone to post 20% down payments, and with MI around, those people can still realize the dream of homeownership.
Mortgage insurance Protection:
Mortgage insurance protection is one type of life insurance designed to pay off your mortgage. if you were to pass away and some policies also cover mortgage payments if you become paralyzed, paraplegic, quadriplegic, etc.
Mortgage insurance may not be popular but it allows Lenders to extend credit to a much wider variety of people from all financial situations. So maybe we can put down the pitchforks? If you have any questions about MI leave those questions in the comments down below, or feel free to email us directly. And make sure to subscribe to keep up with our weekly educational videos. Thanks for watching.