Why is mortgage insurance required?
Mortgage insurance protects the lender against defaults on riskier loans. So, what are some factors that make one loan seem riskier than another?
- No down payment. Borrowers who do not put a down payment toward their home purchase are considered riskier because if the loan defaults, the lender is highly likely to take a loss.
- The mortgage loan amount is higher than the home value. Mortgage loans that exceed the appraised value of the home are considered "upside down." Again, lenders consider these scenarios to be riskier because they are likely to take a loss if the loan defaults before the borrowers have equity in the home.
Is mortgage insurance even necessary?
When buying a home, if you put down 20% or more, you can avoid mortgage insurance altogether. Lenders only require Personal Mortgage Insurance or PMI if you put down less than 20% down on a property. PMI may also be required to refinancing your home. If you don’t have at least 20% equity built up in your home when you refinance, you would have to pay the mortgage insurance.
Be sure to check with your lender because some may not charge it as an additional cost on top of your payment. The lender compensates for the increased risk by charging you a higher percentage rate.
If you qualify and receive a Federal home loan or an FHA loan, such as a Fannie Mae or a Freddie Mac loan, then a mortgage insurance premium is required or MIP for the life of the loan
Is there any benefit to mortgage insurance?
The benefit of mortgage insurance to the buyer is twofold. First, you can buy a home with little to no money down. You don’t have to wait to save the 20% down payment on a house to own one. In some cases, a monthly mortgage payment is less than a monthly rental payment, and you are building equity with a house. Second, lenders can offer lower mortgage rates because they know the mortgage loan will be insured if it goes into default. Of course, you have to weigh this with the monthly PMI payment you will have to make on top of your mortgage payment. As a rule of thumb though, if you can put 20% or more down on a property you are buying, then do so. You can build equity much quicker without having to pay the mortgage insurance every month.
What’s the Difference between PMI and MIP?
PMI is issued from a private mortgage insurer and is the most common type of mortgage insurance in the United States.
MIP is tacked on to all federal or FHA loans (Fannie Mae and Freddie Mac loans) and have to be paid monthly along with a one-time premium to be paid at the sale of the home. Unlike PMI, MIP stays with you for the life of the loan unless you take steps to get rid of it.
How to Get Rid of Your Mortgage Insurance
According to the Home Owner’s Act of 1998 (HOPA), there are three ways to cancel the PMI on your mortgage.
The first way is to continue paying your PMI until it automatically terminates (once the Loan-To-Value (LTV) reaches 78%, or the homeowner gains 22% equity in their home). Note: this only pertains to mortgages signed on or after July 29, 1999.
The second way is to contact your mortgage company and request that your PMI be terminated once you’ve gained 20% equity or 80% LTV of the original property value. Every mortgage company is different, but additional stipulations are usually put on this process. For example, at least a year of good payment history (meaning no late payments within that period) may be required. Also, you may be asked to submit a cancellation request in writing, and you may be required to pay for an actual home appraisal by someone of their choosing. The way around this at this stage is by refinancing your mortgage, this will get rid of your PMI, and if mortgage rates are low, you might be able to reduce your monthly interest payment as well.
The third way is called final termination, and this occurs at the midpoint of the mortgage loan’s amortization period. Contact your mortgage lender to discuss the process of removing mortgage insurance at this point.
I have an FHA loan, and I want to get rid of my MIP
For FHA mortgage loans, MIP is locked in place for two years, meaning you must pay the insurance premium for a minimum of two years (even if your property value has tripled).
On FHA loans, the LTV is lower than private mortgage insurance. The cancellation won’t be considered until the LTV is 75% or less based on the current appraised value.
There is a way around all this, and that is to refinance your FHA loan into a conventional loan and then follow the PMI cancellation guidelines, or if you are below the 80% threshold at the time of refinancing, then you eliminate it completely.
Credit Union of Texas (CUTX) can help
Whether you are looking to buy a home and are interested in a home loan or you have a current home loan and are looking to refinance it, CUTX can help you with both of these. Simply call 972-705-4845 and one of our specialists can help answer your questions. The Credit Union of Texas also offers home equity loans and home equity lines of credit for homeowners.