24 Apr Understanding Private Mortgage Insurance Basics
Within a mortgage or home buying situation, there are a couple types of insurance that may come up. One of these is mortgage insurance, also called private mortgage insurance (PMI).
At City Creek Mortgage, we’re happy to explain the ins and outs of mortgage insurance wherever it applies, from conventional mortgages to FHA loans and many other programs we offer. How does it differ from other insurance types that you might have to think about? How is it paid? Does it benefit you? We’ll answer all those questions here for you.
Difference Between Mortgage and Homeowner’s Insurance
It’s important to differentiate between private mortgage insurance and homeowner’s insurance, which are entirely different things. The former is mostly to safeguard the lender, while the latter is for the benefit and protection of the borrower.
As the name suggests, homeowner’s insurance is for the buyer – to protect their essential belongings and the home itself from burglary, natural disaster and other potential issues. Private mortgage insurance, on the other hand, is a form of insurance paid by the buyer that protects the lender in case of default, typically used in loan situations in exchange for a smaller down payment or allowance of purchase with a lower credit score.
In essence, think of PMI as the balancing factor for you getting a better deal. Your lender is helping you out by allowing a lower down payment or approving you with a lower credit score – in turn, you’re offering them protection by paying private mortgage insurance (until you own enough equity in the home, which we’ll discuss below).
Payment Formats for Mortgage Insurance
There are several ways mortgage insurance might be paid, whether to a private mortgage insurance company or to a government agency like the FHA or VA:
- Monthly: The most common format, monthly PMI payments come with no upfront premium, and are generally lumped in with the overall mortgage payment and paid all at once. They offer plenty of flexibility.
- Single: Some buyers choose a single PMI payment, which can be either refundable or nonrefundable. This amount will sometimes be financed into the loan amount, but may also be kept separate. This option does involve an upfront premium.
- Split: Some portion is paid up front, plus a premium, but a lower monthly renewal amount is then also paid.
- Outside party: In some special circumstances, the lender or a separate third party will pay PMI.
Canceling Mortgage Insurance
As we noted above, PMI is in place to protect the lender against default. But as you pay down more and more of the mortgage, therefore building your equity in the home, the risk of default to the lender goes down – and as such, you can cancel PMI partway into nearly all mortgage situations.
In nearly all cases, you can request a cancellation of PMI once you’ve got the mortgage balance down to 80 percent of the home’s original value. The lender doesn’t necessarily have to approve this request, but once the balance drops to 78 percent instead, it’s an absolute requirement that PMI be cancelled. There are also additional situations where PMI must be cancelled after new appraisals, mostly based on loan-to-value ratios.
For more on private mortgage insurance, or to learn about any of our mortgage loan services, speak to the staff at City Creek Mortgage today.