Mortgage Insurance - What you need to know

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By: tiarajoseph11
on 29th Oct,2012

Go through this article to gather knowledge regarding PMI and how to avoid it. So, lenders require such a policy instead of you.
Mortgage Insurance - What you need to know

Do you know when you need to buy a PMI (Private Mortgage Insurance) policy? This is required when you make less than 20% down payment on your home. However, it is tough to take out a loan without making 20% down payment in the present times. The PMI requirements also vary from one mortgage loan to another, that is, the requirements are largely dependent on the actual down payment and the duration of the home loan. Go through this article to gather knowledge regarding PMI and how to avoid it.


Lenders require mortgage insurance - As the term ‘insurance' suggests, a PMI covers the lender from the financial loss in case you, the borrower, default on the loan. So, lenders require such a policy instead of you. When you cannot make at least 20% down payment on the home, the mortgage insurance company agrees to pay the lender the loss incurred in case of a default; so you, the borrower has to pay the policy premium. Usually, it is 1-5% of the mortgage total along with a monthly fee.

LPMI can be an option - Lender paid PMI or LPMI can be an option instead of you, the borrower, buying the mortgage insurance policy. The lender might agree to pay the mortgage insurance one-time in exchange for a slightly higher rate of interest on the home loan.

The insurance requirement varies - As already mentioned, the insurance requirements vary from one type of mortgage loan to another. In case of a federally insured or an FHA loan, mortgage insurance is to be paid up front as well as making monthly payments if the equity on the property is less than 20%; that is, if you cannot make 20% of the selling price. However, mortgage insurance policy is not required if you obtain a VA loan or an USDA loan.

You can cancel mortgage insurance later - When you continue making mortgage payments, you build equity on the property equivalent to 20% of the buying price. So, after you build 20% equity on the property, call your mortgage lender, who will send you information regarding how to drop off mortgage insurance. Remember you need to check out and initiate the process; rarely the lender will notify you that 20% equity limit has been achieved.

It is always better to assess your financial condition to calculate how much down payment you can make and then start searching for a suitable property. It is always better to wait for some time and save the required payment instead of buying a mortgage insurance policy. If you have a good credit score and you make 20% down payment, then you'll be able to take out a mortgage loan with terms and conditions favorable for you.

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