Why Do I Need Mortgage Insurance?

For most homebuyers, the biggest hurdle to owning a home is the down payment.  Private mortgage insurance, or private MI, can allow you to purchase a home with less down than what otherwise may be required.

Private Mortgage Insurance

On a conventional loan, you can have as little as a 5% down payment, utilizing mortgage insurance (MI).

What is private MI?

Private MI protects a mortgage lender if a homeowner stops making mortgage payments.  Since studies show loans with less than a 20% down payment are more likely to default, these loans are considered riskier for lenders and investors.  That’s why lenders generally require private MI for “conventional” loans with less than 20% down.

While MI provides an obvious benefit to lenders, many times home buyers overlook the benefit MI affords them.  These can be signficant and may include:

  • Buying a home sooner – a higher loan-to-value ratio means less time is needed to save for a down payment.
  • Increased buying power – if you have a certain amount set aside for a down payment, using MI may help you afford more home than if you put 20% down.
  • Expanded cash-flow options – you may put less down and keep cash for other uses (making investments, paying off debt, or paying for home improvements or emergencies).
  • Receiving a refund – some MI options allow for a prorated refund of premiums upon cancellation.
  • Faster approvals – loans with MI typically are approved sooner than non-MI or government-backed structures.
  • Cancelling coverage – many MI options may be cancelled when no longer needed.

How much does private MI cost?

Just like with any other type of insurance, cost varies based on a variety of factors, such as a homebuyer’s credit score, the down payment amount and the type of mortgage, to name a few. 

Cancelling Mortgage Insurance

A federal law called the Homeowner Protection Act requires that mortgage insurance be cancelled when you build up a certain amount of equity in your home. The law applies to most types of mortgages. Talk to your lender about how this applies to you.

When can I cancel MI?
When the balance on your mortgage reaches 80% of the home’s original value or current appraised value, you may request cancellation of your MI. You must have a good payment history with respect to the mortgage, mortgage payments must be current and there can be no other loans against the home. Some lenders also require verification that the property did not decrease in value.

Will it get cancelled automatically?
When the mortgage balance reaches 78% of the home’s original value
and payments are current, the lender is required to cancel the mortgage insurance automatically.

Talk to your trusted mortgage professional about the loan options available to you!

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