Mortgage Industry News & Advice

Why Do I Need Mortgage Insurance?

By on March 28, 2010 in Tips And Advice

Mortgage Insurance, sometimes referred to as Private Mortgage Insurance, is required by lenders on conventional home loans if the borrower is financing more than 80% Loan-To-Value.

According to Wikipedia:

Private Mortgage Insurance (PMI) is insurance payable to a lender or trustee for a pool of securities that may be required when taking out a mortgage loan.

It is insurance to offset losses in the case where a mortgagor is not able to repay the loan and the lender is not able to recover its costs after foreclosure and sale of the mortgaged property.

PMI isn’t necessarily a bad thing since it allows borrowers to purchase a property by qualifying for conventional financing with a lower down payment.

Private Mortgage Insurance (PMI) simply protects your lender against non-payment should you default on your loan.

It’s important to understand that the primary and only real purpose for mortgage insurance is to protect your lender—not you.

As the buyer of this coverage, you’re paying the premiums so that your lender is protected. PMI is often required by lenders due to the higher level of default risk that’s associated with low down payment loans.

Consequently, it’s sole and only benefit to you is a lower down payment mortgage

Private Mortgage Insurance and Mortgage Protection Insurance

Private mortgage insurance and mortgage protection insurance are often confused.

Though they sound similar, they’re two totally different types of insurance products that should never be construed as substitutes for each other.

  • Mortgage protection insurance is essentially a life insurance policy designed to pay off your mortgage in the event of your death.
  • Private mortgage insurance protects your lender, allowing you to finance a home with a smaller down-payment.

Automatic Termination

Thanks to The Homeowner’s Protection Act (HPA) of 1998, borrowers have the right to request private mortgage insurance cancellation when they reach a 20 percent equity in their mortgage. What’s more, lenders are required to automatically cancel PMI coverage when a 78 percent Loan-to-Value is reached.

Some exceptions to these provisions, such as liens on property or not keeping up with payments, may require further PMI coverage.

Also, in many instances your PMI premium is often tax deductible in a similar fashion as the interest paid each year on your new mortgage is tax deductible. Please, check with a tax expert to learn your tax options.

_________________________________

Related Articles – Mortgage Payments:

About the Author

About the Author: Mark Madsen is a Las Vegas Mortgage and Real Estate professional with over 15 years banking experience who specializes in Homeownership Education. Mark is the managing partner for a national FHA 203k Rehab Loan network of home renovation experts, and a founding member of the non-profit #MREV movement. .

Subscribe

If you enjoyed this article, subscribe now to receive more just like it.

Comments are closed.

Top