What is mortgage insurance? This is a very important question to understand if you are about to buy a home, especially for the first time. When you talk about mortgage insurance, you are talking about the protection of your property, but you are also talking about money out of your pocket. Here are the basics about mortgage insurance and how it affects you during your real estate negotiation process.
What is mortgage insurance?
Mortgage insurance is the policy that financially shields the lending institution in a real estate negotiation. If a borrower defaults on a mortgage, the lender still gets paid. If you are using a government sponsored entity (GSE) such as the Federal Housing Administration (FHA) to underwrite your loan, then your lender will usually insist that you obtain this policy.
The borrower pays for the mortgage insurance, and most of them will require it if you do not make a cash down payment of at least 20 percent within a conventional loan package. There may be other options if you are insured by a GSE, but 20 percent of the total home value as a down payment is the industry standard baseline.
Mortgage insurance is also known as private mortgage insurance (PMI).
Who actually sells PMI?
The FHA has a mortgage insurance program that it applies to loans that are under its jurisdiction already. If you are not getting a loan from the FHA, you can purchase mortgage insurance from a licensed insurance company, usually one that is also approved by your lender.
How much does PMI add to my monthly mortgage payment?
Although charges can differ, a PMI payment will usually add around one percent to a loan per year that a borrower pays, up to an industry standard maximum of 1.5 percent. The PMI does not add anything to the borrower’s equity in the home.
What affects the percentage rate of PMI that I pay?
Like most other fees in real estate, the percentage of home value that you pay in PMI depends on your credit score. The higher that your credit score is, the higher that your percentage will be. You will get the lowest percentage PMI payment for a credit score of 740 or above.
Is the PMI payment tax deductible?
Check with your tax or real estate attorney to find out if your PMI payments are tax deductible. The status changes depending on what Congress says that year.
Do I have to pay mortgage insurance no matter what?
The PMI payments that the lender requires can be avoided with a 20 percent minimum down payment in the home.
Do I have to pay PMI for the rest of my loan?
The rules for PMI payments from the FHA have recently changed; if you gained enough equity in your home before this change, PMI payments would automatically stop. The industry standard amount of equity that you had to hold was 22 percent, leaving a 78 percent outstanding loan balance on the home. However, this is no longer the case. You must now continue to pay PMI over the entire life of an FHA loan if you begin that loan by paying it. You must work out a refinance agreement with your lender directly and usually switch into a conventional loan from a GSE.
If you are dealing with a lender without the backing of a GSE, then you will need to work out an individual agreement with your lender. You can always ask the lender to drop the requirement for PMI, but it is better if you set the terms from the very beginning of the lending contract. In most cases, your lender will drop the PMI payment once your equity in the property equals 20 percent, leaving an 80 percent outstanding loan balance.
What are the steps to get a PMI payment canceled?
First of all, make sure that your loan is not backed by the FHA. Your lender must give you an approximate ETA for getting down to the 80 percent threshold at the closing table. You will also receive a statement every year that shows you exactly who to call to get the cancelation process started.
You will need a completely new appraisal on the home. Prepare for a cost of $500 for this appraisal. Your bank will need to see that you have around 20 percent equity in the home. In order to ascertain the exact percentage that you have, the value has to be set.
You can bring about this date to cancel much sooner if you prepay just a little bit more on your loan each month. As long as your lending contract states that all payments above the minimum go towards the principal, you are doing your self a favor by paying early.
Does PMI protect the borrower at all?
Contrary to what people may believe, there is very little protection that the PMI gives to the borrower other than legal compliance in the event of a GSE backed loan. Do not let the word “insurance” fool you; PMI is for the lender, not you.
Follow the tips above to minimize your PMI and increase your equity immediately. Although you may have to negotiate paying it for a while, you can cancel it when the time is right. Pay attention to statements from your lender. Stay on top on your payments, and cancel as soon as you are able.
2 Point Highlight
Check with your tax or real estate attorney to find out if your PMI payments are tax deductible. The status changes depending on what Congress says that year.
Contrary to what people may believe, there is very little protection that the PMI gives to the borrower other than legal compliance in the event of a GSE backed loan.
