Understanding Mortgage Insurance
What is mortgage insurance and how does it benefit homebuyers?
Mortgage insurance is an insurance premium paid by a borrower on loans with less than a 20% down payment that provides financial protection for lenders and investors if the borrower were to default on the loan. It is beneficial to homebuyers because with mortgage insurance homebuyers can buy a home much quicker by allowing down payments of less than 20%.
There are two main types of mortgage insurance, PMI also known as private mortgage insurance and MIP also known as mortgage insurance premium. Private mortgage insurance (PMI) is only applicable to conventional loans, whereas mortgage insurance premium (MIP) is only applicable to FHA loans. FHA mortgage loans are a government insured loan program through the Federal Housing Administration which is backed by the Secretary of Housing and Urban Development. Learn more about FHA and Conventional loan programs.
Can mortgage insurance be removed from my loan?
Yes, no matter what loan program you are in you can have the mortgage insurance removed from your loan. The way to go about having the mortgage insurance removed depends on the type of loan you have and what your down payment was when you originally bought the house.
By law, lenders must automatically cancel conventional private mortgage insurance when the loan reaches 78% loan to value. It is important to keep in mind that most lenders use the property’s last appraised value to determine the loan to value ratio. You can also refinance your loan once it reaches 80% loan to value to eliminate your private mortgage insurance.
In a study done by National MI, for conventional loans with a 10-15% down payment it can take on average 5-7 years for the loan to value to reach 78% for automatic cancellation. For loans with less than a 10% down payment however, it can take on average 7-10 years to reach 78% loan to value for automatic cancellation. Private Mortgage Insurance vs. FHA | National MI
For FHA loans with less than a 10% down payment that were originated on or after June 3rd, 2013, the loan would have to be refinanced to a conventional loan once it reaches an 80% loan to value ratio to drop the mortgage insurance premium. FHA loans with an application date on or before June 3rd, 2013 that were originated with greater than a 90% loan to value ratio will have mortgage insurance on their loan for the life of their loan. The only way to avoid paying mortgage insurance for the duration of the loan term would be to refinance to a conventional loan once the loan meets the eligible loan to value ratios for mortgage insurance removal. For loans originated during the same time with a 90% loan to value ratio or less, mortgage insurance will remain on the loan for 11 years. Refinance loans, even those with less than a 78% loan to value ratio, are still subject to mortgage insurance. You can view the full chart here.
The bottom line…
When it comes to mortgage insurance, know that it is here to help. Mortgage insurance opens the door for borrowers with lower credit scores and those with limited funds to put towards a down payment qualify to buy a home. I am here to help answer your questions and guide you through the loan process when you are ready to move forward with a new home purchase or refinance, so contact me anytime!