This series has been designed with our homebuyers in mind. Regardless if you are a first-time or veteran buyer, the first step of the home buying process often involves shopping for a loan. This process is not always as simple as it sounds! Which types of loans are there? What is the difference between them? Which loan is best for you? Through this new series, we will help you navigate through those questions and the loan process, breaking down the most common loans that we deal with here at Nashville On The Move.
Week 6: Mortgage Insurance
Mortgage insurance sometimes is referred to as private mortgage insurance, or PMI, to distinguish it from FHA and VA insurance, run by government programs. The cost of mortgage insurance varies depending on the size of the down payment and the loan, but it typically amounts to about one-half of 1 percent of the loan.
So if you’re buying a house for, say, $150,000 and putting 10 percent down ($15,000), the annual cost of PMI on your $135,000 mortgage might run $675 a year, or $56.25 a month.
With mortgage insurance, the borrower pays the premiums, but the lender is the beneficiary. The coverage protects lenders against default by the borrower. If a borrower stops paying on a mortgage, the insurance company ensures that the lender will be paid in full.
Mortgage companies pick insurance providers for their customers, but the borrowers have to foot the bill. Usually, they do so in monthly installments. But some lenders offer programs whereby the borrower pays the entire insurance premium in a lump sum at closing.
If you are buying a home and putting up a downpayment of less than 20 percent of the home’s value, then generally you don’t have a choice of whether to buy this type of insurance. The lender requires it.
In years past, some lenders would continue to collect PMI premiums even after the mortgage balance had fallen to well below 80 percent of the home’s original value. But Congress passed the Homeowners Protection Act of 1998, which allows homeowners to request that the lender cancel PMI when the mortgage loan-to-value ratio falls to 80 percent and requires the lender to cancel it when the ratio falls to 78 percent.
By the way, appreciation in the home’s value isn’t taken into account in calculating this ratio — only the decline in the mortgage balance counts.
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