MORTGAGE INSURANCE

This is an insurance policy to help protect or buffer a lender’s risk in in case of loan default.  It is called Mortgage Insurance (MI) or Private Mortgage Insurance (PMI). Mortgage insurance is required on all loans with greater risk that 80.00% Loan-To-Value (LTV).  But, if you don’t have 20% to put down, and most first time home buyers DON’T, then you can still obtain the American Dream.

Since the lender is taking an 80% to 100% risk that you will pay, conversely, you have a 20% to 0% risk in ownership. If you default on your loan and the lender must foreclose on your property, then the lender will have funds to offset any possible loss occurred.  The lender has an obligation to pay for all loans that he has outstanding, on time… Money is not FREE.

The good side of all this, is that when the value of your property becomes greater than 80% LTV, the PMI portion of your payment can be stopped. In order to have the PMI removed from your monthly payment, it is required that a new appraisal (to determine property value) and a credit report (to show good standing of paying your monthly payments) are supplied to your mortgage service provider.  The appraisal must indicate that your mortgage lender has less than 80% ownership value in the property and that you have retained a similar credit rating during the period of time you have had your mortgage.

Cost of Mortgage Insurance depends on the amount of risk to the lender. As the risk increases from 80.01% to 100% LTV, so does the policy premium. The range of increase to your interest rate is from about .375% for 80.1% LTV to 1.5% for 100% LTV.  Most PMI companies require as a closing cost at loan origination, prepayment of this 6-12 monthly to be held in escrow.  This payment is held in escrow and monthly withdrawals are made to the PMI company.  This escrow held payment is transferable to a new loan (not refundable), BUT only if performed during this 6-12 month time period after loan origination