What is Mortgage Insurance?
When buying a home there seems to be a list of fees and costs associated with the actual home purchase price—appraisal costs, home inspection fees, recording fees—today we are going to look at Private Mortgage Insurance (this is different from mortgage insurance associated with FHA and VA Loans); exactly what that cost is and why it is needed.
If you think about the times when you have needed insurance in your life; car insurance, life insurance, and medical insurance, each type is designed to protect you during an unexpected event. Private mortgage insurance is designed to protect your lender should something unexpected happen and the home must go into foreclosures. In short, private mortgage insurance helps shield the lender against potential losses with defaulted mortgage loans.
Not everyone is required to carry private mortgage insurance. For example, if you have a down payment of 20% or more then you will not be required to carry private mortgage insurance. Lenders view those who can put 20% down on a house as being less of a risk of defaulting on their mortgage payments. After all, they have more “skin in the game” than those who, say, have a 3% down payment. For those of us who put less than 20% down, the good news is that we don’t have to pay private mortgage insurance forever, for the most part*! Once we have achieved 20% equity we don’t have to pay for private mortgage insurance.
(I’ll pause while you do a happy dance)
The private mortgage insurance will be we automatically cancelled once the loan to value ratio reaches 22% the mortgage insurance will be cancelled. All of this said, you can avoid paying private mortgage insurance with that larger down payment mentioned earlier but no matter if you have the mortgage insurance payment or not—homeownership, as always, is considered a solid investment!
*FHA and VA Loans have different rules for mortgage insurance; to find out more ask one of our Loan Officers about the different loan types available. You can find one near you at www.smcapproved.com
Source: http://www.homes.com/blog/2016/03/mortgage-101-everything-you-need-to-know-about-mortgage-insurance/