Typically, a 20% down payment is required to buy a home with a mortgage. But if you do not have a 20% down payment, you could possibly qualify for a mortgage with a lower down payment by paying for mortgage insurance.
Private Mortgage Insurance (PMI) is the mortgage insurance for conventional home loans, and Mortgage Insurance Premium (MIP) is the mortgage insurance for FHA loans.
Private Mortgage Insurance (PMI)
When you take out a home loan, lenders feel confident in issuing credit based on these facts:
- You qualify as a borrower.
- Your home will be collateral for the mortgage.
- You have the money to pay the down payment.
- You can pay the closing costs.
So when you don’t have a 20% down payment, lenders need assurance that you can pay the mortgage. With some conventional home loans, Private Mortgage Insurance (PMI) is added to the mortgage because of a low down payment.
Private Mortgage Insurance reimburses the lender if you default on your home loan. Therefore, lenders can take on the extra risk of borrowers who do not have a 20% down payment; and borrowers get a home loan with less than a 20% down payment.
How Does Private Mortgage Insurance (PMI) Work?
When a borrower qualifies to buy a home, but can’t pay a 20% down payment, a lender may approve the loan if the borrower takes out mortgage insurance.
From a borrower’s perspective, there’s a simple choice: either save more until the 20% down payment can be made, or take out mortgage insurance.
Typically, PMI payments are very affordable, and therefore taking out Private Mortgage Insurance isn’t a bad idea for borrowers. On average, PMI payments cost around $30 – $100 per month for every $100,000 borrowed, depending on the details of the loan.
How Long Do PMI Payments Last?
For borrowers who take out mortgage insurance due to the fact that they don’t have a 20% down payment, there is some good news.
Your mortgage insurance payments won’t last forever. Once you have paid down the principle on your loan sufficiently, the PMI will be cancelled. How long you will need to make mortgage insurance payments depends on how much you have borrowed, and the total appraised value of your home.
In general, conventional mortgages signed on, or after, July 29, 1999 automatically terminate PMI payments once the homeowner reaches 22% equity in their home, based on the original property value. But, borrowers have the right to request the termination of mortgage insurance once they gain 20% home equity.
For some homeowners who are paying mortgage insurance and whose property value has increased, it may make sense to refinance their mortgage to remove the insurance payments. In such cases, consult a mortgage originator to see if this makes financial sense for your circumstances.
FHA: Mortgage Insurance Premium (MIP)
Unlike conventional home loans that require a 20% down payment, and can add PMI in the event of a lower down payment, all FHA home loans have a lower down payment and therefore have mortgage insurance (MIP).
The laws concerning cancellation of FHA MIP have changes numerous times in past years, resulting in confusion.
Not all FHA home loans will cancel MIP automatically at 78% LTV, so contact your loan originator to review your mortgage. You may need to refinance to drop the MIP, and save money on your mortgage.
Marimark mortgage is a mortgage origination company serving Florida, Virginia, and Pennsylvania.
We have helped homeowners save thousands every year by refinancing their mortgage to a lower interest rate without mortgage insurance.
If you have questions relating to removing the mortgage insurance from your mortgage, it would be our pleasure to help you. So, please contact us at your earliest convince.