What is mortgage insurance and why is it necessary? Mortgage insurance protects the lender on a home loan when there is less than a 20% down payment. Mortgage insurance protects the lender in case the mortgage loan defaults. When refinancing a home loan if there is less than 20% equity in the home, mortgage insurance is also required.
What loans have mortgage insurance?
All types of traditional loans have mortgage insurance that is required to be paid in addition to the monthly mortgage payment. FHA, USDA and Conventional Home Loans require mortgage insurance. The lower the down payment that is made on the home purchase there is a higher risk associated with the home loan. Because of this risk mortgage lenders require monthly mortgage insurance premiums.
Cheaper Mortgage Insurance.
The closer the loan is to an 80% loan to value or the larger the down payment made, the cheaper the mortgage insurance will be on a monthly basis. If a borrower puts a 20% down payment when purchasing a home, mortgage insurance will not be required.
Most home buyers do not have a 20% down payment, and will pay mortgage insurance in addition to their mortgage payment. Keep in mind the larger the down payment that is made and the lower loan to value on the mortgage loan the cheaper the monthly mortgage insurance will be. Even a 5%, 10% or 15% down payment will drastically reduce the monthly mortgage insurance premium.
How to remove mortgage insurance?
Mortgage insurance can be removed from your monthly mortgage payment in a few different ways. Over time in most cases your home value will increase slightly and as the years go by the mortgage balance on your will decrease. In this case it's possible to contact the servicing mortgage lender and ask about the process to remove mortgage insurance. If mortgage payments have been made on time and there is 20% equity in the home, its worth a phone call to your lender.
Mortgage insurance can also be removed by refinancing your loan and having the home appraised. If there is 20% equity in the home, mortgage insurance will not be required.
Be sure to review home values in your area, and keep an eye on your mortgage balance. Before you know it, the mortgage loan balance in relation to the home values in the area may be 80% or less and you are on your way to removing mortgage insurance!
If you need to chat with a lender let us know we can help!
Hippotecca Staff
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