What Are Mortgage Insurance Premiums?

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Mortgage Q&A: “What are mortgage insurance premiums?”

If you happen to take out a mortgage for more than 80 percent of the appraised value or purchase price, you’ll likely need to pay for mortgage insurance.

And contrary to what you may think, mortgage insurance protects the mortgage lender from borrower default. Not you from anyone or anything else.

That’s right; banks and lenders require mortgage insurance because your home loan is deemed “high risk” based on the high loan-to-value ratio (LTV).

This means you’ll pay a mortgage insurance premium each month alongside your mortgage payment, which typically includes taxes and homeowners insurance as well.

FHA Loans Require Upfront and Monthly Mortgage Insurance Premiums

For FHA loans, you must pay both an upfront mortgage insurance premium, along with an annual mortgage insurance premium.

The upfront mortgage insurance premium can be financed or paid as a closing cost, while the annual mortgage insurance premium is typically paid monthly in the total mortgage payment.

Mortgage insurance premiums must also be paid on conventional mortgage loans that exceed 80 percent LTV, and coverage will range based on the private company providing PMI.

However, a lender might say there isn’t any PMI, and instead of charging you a separate premium, will just charge you a higher mortgage rate.

Thus, the cost is passed along via higher interest payments. Either way, it’s being charged, so don’t kid yourself.

The only way to avoid it is to take out a loan for 80% LTV or less, or to do a combo loan.

The cost of mortgage insurance can fluctuate depending on things like the LTV, loan type, transaction type (purchase money mortgage vs mortgage refinance) and credit score.

How to Stop Mortgage Insurance Premiums

Homeowners can request the termination of mortgage insurance once the LTV hits 80 percent of the original purchase price or appraised value at the time the loan was obtained (whichever is lower).

And it must be removed by the lender or loan servicer once the LTV reaches 78 percent.

You can also ask for a new appraisal to get it removed based on today’s value, which would need to be higher to push down the LTV to the required level.

Either way, you must have solid payment history, meaning no missed mortgage payments in the year prior to the request.

So only borrowers in good standing have this option. Yet another reason to stay current on your mortgage.

Tip: You can avoid mortgage insurance altogether with a combo loan.


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