Mortgage Protection: When Private Mortgage Insurance Is Required?

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Introduction

In this era, people are becoming very proactive regarding their property protection. Be it vehicle, life, health, or even house – people purchase insurance to protect themselves. Likewise, lenders require borrowers to purchase mortgage insurance after extending the mortgage. There are several circumstances regarding when private mortgage insurance is required. 

Types of Mortgage Insurance Loans

Before delving into the question mentioned above, we should understand what private mortgage insurance is. Whenever you take out a mortgage and pay less than a 20% down payment for the property, lenders will require you to purchase a private mortgage. However, once your loan-to-value (LTV) ratio reaches 80%, you can request the lender to nullify the insurance payments. 

Furthermore, the lender has to cancel the insurance himself once the loan-to-value ratio reaches 78%. Besides private mortgage insurance, you should also know what MIP is. Mortgage insurance premium (MIP) is another insurance policy for government-backed FHA loans, whereas private mortgage insurance is for conventional loans. 

The basic difference between them is that PMI ends after your LTV ratio reaches 80%, while MIP continues for up to eleven years. Moreover, MIP requires you to pay an upfront cost, around 1.75% of the total loan, while there are no such costs with PMI.

When Private Mortgage Insurance Is Required?

First, we should try to answer the question, “when is private mortgage insurance required.” So, breaking it down, there are two types of mortgages: FHA loans and conventional mortgages. Therefore, PMI is required for conventional mortgages when you pay less than 20% amount as a down-payment. 

However, a Mortgage insurance premium is only applicable for FHA loans, and you have to pay an upfront cost for the loan. But, it’s mandatory for all types of FHA loans. So, you need PMI when your LTV is less than 80%, and you have to get MPI if you opt for FHA loans. 

Furthermore, you must know what a mortgage insurance policy covers. Simply put, it’s for the protection of the lender. It does no good to you if you default on monthly mortgage payments due to redundancy. Also, high precautionary expenses can cause an overburden for you and prevent you from making mortgage payments. 

In such cases, mortgages help to reduce the risks associated with the lender. In addition, Freddie Mac and Fannie Mae are the largest investors to whom mortgages are sold; these insurance policies guarantee them in liquidation cases. 

How Does Mortgage Insurance Work?

Having discussed the mortgage insurance’s coverage, we should now look at how mortgage insurance works. They have quite a simple mechanism, and they are just like any other insurance policy. In the MPI case, you just have to make a monthly premium payment for the insurance to keep your policy intact. 

On the contrary, you have to pay an additional upfront cost with monthly payments for MIP. In addition, you can end your MPI once your LTV ratio reaches a value of 80%, while you can only cancel your MIP after eleven years from the commencement of the mortgage. If you want to end your MIP payments, you can do so by refinancing in another mortgage once your FHA loan’s LTV reaches 80%. 

Endnote 

Mortgages might be one of the biggest debt obligations in a person’s life. With huge obligations comes great responsibility. The basic answer to the question “when is private mortgage insurance required” is when the down-payment is such that it puts the lender’s funds at risk. 

Due to high risk, lenders hesitate in advancing such huge funds. Fortunately, mortgage insurance provides collateral for their funds. If you’re looking for free and customizable mortgage quotes, try reaching us on RateChecker.com and get your free quote. 

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