Mortgage Insurance Unraveled - What is it, and Do You Need It?

Private Mortgage Insurance (PMI) is a policy provided by private insurance companies. It's typically required when a borrower is unable to make a down payment of at least 20% of the home's purchase price. PMI protects the lender in case the borrower defaults on the loan.

Mortgage Insurance Premium (MIP)

Mortgage Insurance Premium (MIP) is a type of mortgage insurance for loans backed by the Federal Housing Administration (FHA). Unlike PMI, MIP is mandatory for FHA loans, regardless of the size of the down payment. It's a way to mitigate the risk for lenders when lending to borrowers with lower credit scores or smaller down payments.

The Cost of Mortgage Insurance Now that we've covered mortgage insurance - what is it that determines its cost? Several factors come into play:

• Loan amount
• Down payment size
• Type of mortgage insurance (PMI or MIP)
• Credit score
• Length of the loan

Typically, the cost of mortgage insurance ranges from 0.3% to 1.5% of the loan amount per year, depending on the factors mentioned above. The premiums are usually added to your monthly mortgage payment.

Cancelling Mortgage Insurance Is there a way to get rid of mortgage insurance? You bet!

Ditching PMI For PMI, once you've built up at least 20% equity in your home (through a combination of your down payment and mortgage payments), you can request to have the PMI removed. Some lenders may also automatically cancel PMI when you reach 22% equity. It's important to keep an eye on your home's value and your mortgage balance to know when you might be eligible for PMI cancellation.

Saying Goodbye to MIP As for MIP, it's a bit trickier. For FHA loans originated after June 2013, MIP is typically for the life of the loan if your down payment is less than 10%. If you made a down payment of 10% or more, MIP can be cancelled after 11 years. The only way to remove MIP earlier is by refinancing into a non-FHA loan.

Do You Really Need Mortgage Insurance?

While mortgage insurance may seem like an added expense, it can be beneficial in certain situations. Here are some reasons why you might need mortgage insurance:

1. It enables you to buy a home with a smaller down payment, making homeownership more accessible.
2. Lenders may be more willing to approve your loan application if they know they're protected by mortgage insurance.
3. Mortgage insurance can provide peace of mind, knowing that your lender is protected in case you can't make your mortgage payments.

FAQs

Q: Is mortgage insurance tax-deductible?
A: Yes, in some cases, mortgage insurance premiums can be tax-deductible. However, there are income limits and other restrictions that apply. It's essential to consult a tax professional to determine if you're eligible for this deduction.

Q: Can I choose my mortgage insurance provider?
A: For PMI, you may have some say in which insurance company you go with, depending on your lender. However, for MIP, the insurance is provided by the FHA, so there's no choice involved.

Q: Do all home loans require mortgage insurance?
A: No, not all home loans require mortgage insurance. It's generally required when the down payment is less than 20% of the home's purchase price. Some loan programs, like VA loans for military veterans, don't require mortgage insurance at all.

Q: What is lender-paid mortgage insurance (LPMI)?
A: Lender-paid mortgage insurance (LPMI) is an alternative to borrower-paid mortgage insurance. With LPMI, the lender pays the mortgage insurance premium upfront, and the cost is typically passed on to the borrower in the form of a slightly higher interest rate.

Conclusion

Mortgage insurance - what is it, and do you need it? By now, you should have a clearer understanding of the purpose and benefits of mortgage insurance. It serves as a safety net for lenders and can help make homeownership a reality for those who might not have a large down payment. Remember to keep an eye on your home equity and mortgage balance to know when you may be eligible