The mortgage insurance that we are going to discuss is known as Private Mortgage Insurance (PMI). This is insurance that the lender requires the borrower to carry on the mortgage to protect against loss from the buyer’s default on the note. There is an insurance called public insurance, but that is not applicable to this article. The requirements for insurance will vary according to the buyer’s credit score and history, the amount being financed and the rules and regulations of the lender.
Private Mortgage Insurance will be required by most lenders when the buyer does not put down an adequate down payment to secure the property. The threshold for most loans is a down payment of 20% of the home value. The rate for the premium will be somewhere from 1.5% and 6% of the amount financed. The premium can be paid up front in a lump sum, annually, or through monthly mortgage payments.
Sometimes you can ask the lender to pay for the PMI. When the lender agrees, it will generally be because you will pay a higher interest rate on the loan than without the PMI. As a homeowner that does not have 20% equity in the property, you are going to be required to have both policies. Mortgage insurance is insurance that pays for the home when the home owner dies before paying off the note. This is insurance that protects the buyer.
You can see that there are several types of mortgage insurance and the benefit can be to the lender or to the borrower or both. Just because the buyer is paying for the PMI and the lender is the ultimate beneficiary of the benefits, doesn’t mean that the buyer will not receive a benefit. The borrower who doesn’t have to invest a lot of money into the down payment of the home has money for other bills and home improvements for the property.
The PMI can be cancelled when certain conditions exist. Effective November 2010, the federal law stipulates that PMI be cancelled automatically when the owner has invested 22% into the value of the home, either through payments or through remodeling and home increases as verified by an appraisal. This automatic cancellation applies to loans that originated on or after July 29, 1999.
If you have the PMI cancelled you may have a refund coming. If you pay month to month you probably won’t qualify. Your monthly payment will cease and you won’t pay on overage. If you paid up front or you pay annually you may be eligible for a refund if the PMI is cancelled and the entire period of coverage has not been fulfilled.
Remember, if you want to cancel your PMI before the automatic cancellation, you can make additional payments on your loan to escalate your principal balance. You can avail an appraisal that will show your home has increased in value to the 78% threshold. This could save you money in the long run.