When you’re financing a home, you’ll likely come across the term “mortgage insurance.” It’s easy to confuse this with homeowners’ insurance, but it’s vastly different from insuring your physical property. Instead, mortgage insurance is put in place for the sole purpose of protecting the lender in case you can’t make your mortgage payments as agreed.
Not all mortgages require mortgage insurance, and there are methods for avoiding or getting rid of this expense altogether.
What is Mortgage Insurance?
Mortgage insurance is a type of insurance that protects the lender in the event the borrower stops making their mortgage payments. It is typically required for borrowers who make a down payment of less than 20% of the purchase price of the home. You may also see it referred to as private mortgage insurance, or PMI.
While mortgage insurance does add to the overall cost of your mortgage, having it in place for the lender does make it possible for you to borrow money for a home with less than a 20% down payment.
Is Mortgage Insurance Required?
Mortgage insurance is not required by law, but it is often required by lenders on certain loan products. You’ll find it required with conventional loans with down payments of less than 20%, as well as Federal Housing Administration (FHA), U.S. Department of Agriculture (USDA) loans, and others if you don’t meet the down payment requirements for avoiding it.
In addition to lenders requiring mortgage insurance if your down payment is less than 20%, it’s also required if you refinance your mortgage and the loan-to-value ratio (or LTV, which is the amount of money you’re borrowing compared to the home’s value) is over 80%.
What Does Mortgage Insurance Cover?
Mortgage insurance covers the lender for the difference between the amount of the loan and the value of the home. It only provides protection to the lender and not the borrower.
In worst case scenarios, this means the lender will not lose money if the borrower defaults and the home is foreclosed on and sold for less than the amount of the loan. The mortgage insurance covers the gap between what the home sold for and what is owed on the mortgage.
How Much is Mortgage Insurance?
The cost of mortgage insurance varies depending on several factors, including:
- Amount of the loan
- Down payment
- Borrower’s credit score
- Loan-to-value ratio
Mortgage insurance is generally expressed as a percentage of the loan amount and is paid monthly. Some lenders offer the option of paying a single premium up front, when you close on your loan, instead of making monthly payments.
Is Mortgage Insurance Tax Deductible?
Mortgage insurance premiums are no longer tax deductible. This was allowed as a deduction in the past, but it has since expired.
How to Remove Mortgage Insurance
There are two ways to remove mortgage insurance:
- By refinancing your loan once you have 20% equity in your home.
- By requesting your lender cancel your mortgage insurance if you have reached a certain point in your loan term, have a good payment history, and your loan qualifies for the removal.
If you have questions regarding mortgage loan approvals, how much of a down payment you need, or any other questions regarding mortgages and mortgage insurance, then contact one of our lending experts at Peoples National Bank of Kewanee today.
