Do I Need Mortgage Insurance?

Not everyone can afford the standard down payment when buying a home. Instead, they achieve their dream of home ownership through mortgage insurance. So what exactly is mortgage insurance, and how does it affect your home loan?

What is Mortgage Insurance?

Mortgage Insurance is an insurance policy that compensates mortgage lenders for losses due to the default of a mortgage loan.

Having mortgage insurance means that you pay additional money each month. This money covers the lender through the insurance policy in case of the home buyer is unable to make their mortgage payments. Unlike most other forms of insurance, you pay the premiums with mortgage insurance, but you’re not the beneficiary — the lender is.

Is There a Difference with Conventional, FHA, and VA Loans?

If you’re getting a conventional mortgage and you cannot put down 20% on your down payment, you’ll need to pay for a private mortgage insurance or a PMI policy. Private mortgage insurance premium rates vary based on the loan-to-value ratio on the home, your credit score and whether your mortgage is fixed-rate or variable-rate. The loan-to-value ratio is the amount of money you will borrow for the home compared to the value of the home. The more money you use as a down payment, the less you need to borrow, making this ratio more favorable.

For home loans backed by the Federal Housing Administration or FHA, this works differently. Two mortgage insurance premiums are required on all FHA loans: the up-front mortgage insurance premium and the annual mortgage insurance premium. The up-front MIP is calculated as a percentage of your loan amount, regardless of the term of the loan or the loan-to-value ratio. The annual MIP is paid monthly and varies based on the length of the loan, the loan amount and the initial loan-to-value ratio.

For VA loans, borrowers are not required to pay private mortgage insurance on their home loan. The no-down-payment mortgage remains to be a key benefit with the VA Loan Guaranty program. VA borrowers save money each month that other borrowers miss, allowing them to pay down debt, cover regular expenses or pay down their principal, which can shave time and money from their mortgage.

When Can I Remove Private Mortgage Insurance from My Loan?

The Homeowners Protection Act gives you the right to request that your servicer cancel PMI when you have reached the date when the principal balance of your mortgage is scheduled to fall to 80% of the original value of your home. You can also make this request earlier if you have made additional payments that reduce the principal balance of your mortgage to 80 percent of the original value of your home. Even if you don’t ask your servicer to cancel PMI, your servicer still must terminate PMI on the date when your principal balance is scheduled to reach 78 percent of the original value of your home. For your PMI to be cancelled on that date, you need to be current on your payments on the anticipated termination date.