What is Mortgage Insurance?
Mortgage Insurance (MI) is an insurance policy that protects lenders when there is less than 20% equity in a property. With this insurance, if a borrower defaults or fails to pay their mortgage, the lender will not suffer the complete loss. Rather, the lender shares the loss with the mortgage insurer.
You pay for the MI in your monthly mortgage payment. On your mortgage statement you will see a breakdown of your monthly payment. It would be as follows. Principal, Interest, Taxes and Insurance (PITI) and then that final piece being your MI.
Mortgage insurance is not to be confused with homeowners insurance. MI protects the lender. Homeowners insurance protects you.
Do I have to get Mortgage Insurance?
Regardless of the amount of equity you put down on the purchase, if you get a Federal Housing Administration (FHA) loan you always have MI until you pay off the mortgage or refinance out of the FHA loan. Also, in most cases, if you get conventional financing without 20% equity in the property you will need to have MI.
What does it cost?
MI pricing is based on your credit profile and equity. The higher your credit score the lower your MI. The amount of down payment or equity you will have in the property also plays a role in calculating your MI payment. If you are purchasing and you put down 3% your MI will be higher than if you put down 5, 10 or 15%.
How do I break up with my Mortgage Insurance?
If you have an FHA loan, you will have to refinance into a conventional mortgage to get your MI off of your mortgage. Typically, with a conventional loan, after you have paid into your MI for 60 months and your loan reaches 78% loan to value (LTV) of the original appraised value the MI will automatically drop off.
If the market value on your house increases rapidly after you purchase your home and you have paid a minimum of two years of current mortgage payments and the LTV is 78% or less of the original appraised value, you can ask for a termination of your MI. The servicer of your loan will either let you order an appraisal or they will order on your behalf.
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