What is Mortgage Insurance?
Some people have plenty of money for a down payment. For those that don’t, there’s mortgage insurance. If you have already determined that you can’t afford a standard down payment on a home (usually 20% for conventional loans) but you still want to buy, don’t worry. Mortgage insurance exists to help make you a more attractive candidate to lenders.
What is Mortgage Insurance?
Mortgage insurance protects the lender in the event the borrower defaults on the loan. Defaults include failure to make payments because of death, medical bills and job loss. Mortgage insurance can be provided by a private mortgage insurance company (PMI) or by a government agency such as FHA or VA. As a borrower of the loan, you pay the premiums and the lender is the beneficiary.
PMI Insurance with Conventional Loans
Typically, borrowers making a conventional loan down payment of less than 20 percent of the purchase price of the home will need to pay for mortgage insurance. Mortgage insurance may allow you to qualify for a loan that you might not otherwise be able to get. But, it increases the cost of your loan. If you are required to pay mortgage insurance, it will be included in the total monthly payment that you make to your lender, your costs at closing, or both.
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 better your credit, the lower your PMI payments will be. The more money you use as a down payment, the less you have to borrow and the more favorable this ratio is in the view of the lender.
Since PMI correlates to the loan-to-value ratio on your home, the amount of PMI you pay each month will decrease over time as you build equity. This means you are paying off some of what you borrowed and therefore you own a larger percentage of the house.
When your loan is scheduled to reach 78 percent of the home value or sales price, whichever is less, the lender can cancel your PMI. If you’ve paid on time and you think your home’s value has changed since the time of purchase, you may be able to negotiate an earlier cancellation of your PMI. Be sure to keep track of your payments and when that 78 percent mark is approaching. Contact your lender no later than 30 days prior to the cancellation date to let them know your PMI cancellation date is approaching.
If you’re interested in applying for a conventional loan or want to learn more about mortgage insurance and how it works, reach out to a loan officer at First Ohio Home Finance today!
