Mortgage Insurance, Is It Really Required?

PMI, or Private Mortgage Insurance is basically an insurance policy for the lender against the default of your mortgage. Many mortgage lenders require PM in order to give a loan that requires more than 80% funding of the home appraisal. (Example: If you are purchasing a home that appraised at $100,000, PM would be required if you were to borrow more than 80% of the value of the home, or $80,000.)

Previously, lenders would allow borrowers to avoid PMI by giving an “80/20″ or “80/15″ loan. 80% of the loan would be funded by a first mortgage, while the additional 20% would come from a home equity line of credit. This 20% home equity line would mask as a down payment. Often called in the business a piggy back loan. With today’s mortgage market in the state that it is in PMI will be much more prevalent in upcoming months than ever before. 80/20’s have been done away with and lenders are tightening up their guidelines.

Once 20% equity has been established in the home, either through rapid principal pay down or increased appreciation, PMI can be canceled.

MIP, or Mortgage Insurance Premium, is very similar to PMI. The major difference is that MIP is required for all FHA insured loans, and it cannot be canceled regardless of equity, down payment, or credit score. This is why the FHA is to play a vital role in the turnaround of the American Housing market. Had PMI and MIP played a larger role in the mortgage loans that were made in the last few years many more companies and homeowners would have been covered during this subprime meltdown and foreclosure debacle.

The average premium varies depending on the loan program you opt for as well as the amount of down payment or equity you have in your home. You can get a reasonable estimate of what your premium should be by multiplying your loan amount by .0075 and dividing by 12. This will give you an estimated monthly payment. Costs associated with FHA’s MIP are usually higher than conventional PMI figures. This is often due to the FHA insuring riskier loans while simultaneously offering very competitive interest rates.

No one likes to pay that extra bit in their monthly mortgage payment every month but the benefits to our society when implementing PMI and MIP are countless. The housing market would be in a much different state right now if they weren’t so often avoided.

If the mortgage insurance is really getting to you, look into mortgage accelerators that will help you build equity faster by paying down the principal of your loan faster. Many accelerators are legitimate but as always do plenty of research before choosing one.

By Melissa Fish Editor at uslso.com Apply for a Home Loan Today!

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