Mortgage Insurance Protection – What You Need to Know

Mortgage insurance is required by lenders if you get an FHA loan or make a down payment of less than 20 percent. Some states have laws that prohibit an LTV (loan-to-value) ratio of more than 8- percent without insurance. Also the secondary market may not purchase this type of loan without insurance. Your lender will set up and purchase this type of insurance.

For FHA loans, your loan is backed by an insurance program; this means you must pay the insurance premium. This type of mortgage is called a mortgage insurance premium, or MIP.

Conventional loans require private mortgage insurance, or PMI, when you put less than 20 percent down. Both MIPs and PMI work the same way; they help the lender recover the cost of selling your home if you default on the loan.

Paying Mortgage Insurance

With an FHA loan you pay 2.25 percent of the loan amount at the closing plus a monthly fee. This premium provides insurance for the life of the loan and can be financed. If you sell or refinance and FHA loan, you may be entitled to a refund. Ask your lender. For private mortgage insurance, you usually pay two months worth at close, plus a monthly charge, or you can pay a lump-sum payment. The amount depends on the down payment the coverage required by the lender, and the type of loan (fixed or ARM).

Canceling Mortgage Insurance

Depending on the loan agreement, you may be able to cancel the insurance once you reach a certain equity. If you have 20 percent equity (8o percent loan-to-value), you may be able to stop paying insurance.

Another way to get the PMI payment taken off your loan is to have your home appraised by your lender’s approved appraiser. If you go this route, the lender will require you to have 25 percent equity and usually you must have had the loan for at least 12 months.

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