FRANKLIN NEWSFLASH: MORTGAGE INSURANCE WHAT IS IT, DO I NEED IT?
Mortgage Insurance (MI) is required by a lending institution for people who are unable to meet the required down payment of 20% of the value of the home they wish to buy. The purpose of MI is primarily to protect the lender from loss in the event that the borrower is unable to pay what is left on the home.
For example, if a buyer (Mr. Lewis) wants to buy a house valued at $200,000. He would need to pay $40,000 (20% of $200,000) to the mortgage institution as down payment and the remaining 80% over the tenure of the loan would have the MI factor applied.
Mortgage Insurance also covers the following:
- Accumulated interest during the period of default
- Legal fees
- Home maintenance and repair expenses
- Real estate broker’s fees and closing costs
- Property resold for less than original sales price
It doesn’t cover
- Damage to the property
- Death of borrower
Benefits of Mortgage Insurance
Although the purpose of Mortgage Insurance is to protect the lender from loss, it has the following benefits for a home buyer:
You Can Start Early: It helps you get into the home sooner by reducing the amount of money needed for a down payment.
Increased Purchasing Power: With MI, you can decide to go for a bigger house even if you previously had 20% saved up for a particular home.
You Can Do More: You can pay less of your down payment and use the left-over cash for other purposes like investing, home improvement or debt settlement.
Types of Mortgage Insurance
There are basically 2 classes of Mortgage Insurance- Government-Backed Mortgage Insurance and Private Mortgage Insurance.
Government –Backed Mortgage Insurance
Federal Housing Administration (FHA) Mortgage Insurance: This applies to FHA insured loans and provides insurance for single to four-family homes. The FHA was created through the National Housing Act of 1934 with one of its objectives being to make housing and home mortgages more affordable.
Because Insurance premiums on FHA loans are uniform, your credit score does not matter unlike private mortgage insurance where it does play a factor.
Department Of Veterans’ Affairs (VA) Home Loan Guarantee Program: The VA Home Loan Guarantee is a replacement MI for war veterans and does not necessarily require a down payment. However, there is an upfront fee which varies based on factors such as the branch of military service, the down payment amount and VA loan history.
Private Mortgage Insurance (PMI)
This applies to conventional loans, PMI costs 0.25% to 2% of your loan balance annually, depending on the down payment amount, the loan and your credit score.
Cancelling Private Mortgage Insurance
The insurer cannot cancel Mortgage insurance except in the case of fraud or non-payment of premium.
You may apply to cancel your PMI when
Your LTV ratio is <80%
There are no other loans on the house
You are current on all payments