OK, you’ve purchased a home and remember signing a whole bunch of papers. Or maybe you’re getting ready to purchase or close a home. Do you know that if you did not pay 20% (of the price of the house) or more for the down-payment that you have been (or will be) required to pay mortgage insurance which could be costing you as much as $55/month or more? If it has been several years since you purchased your house you may find that you are no longer required to pay mortgage insurance.
Private Mortgage Insurance (PMI) and Mortgage Insurance Premium (MIP) are insurance premiums that homeowners pay when they have borrowed more than 80% of the value of their home.
For a great definition of private mortgage insurance see: PMI (Wikipedia) and for mortgage insurance premium see: MIP (Wikipedia). Basically, if you purchase a home and borrow more than 80% of its value then the lender will require you to purchase insurance in the event that you cannot make the payments and the loan is defaulted. This insurance does not benefit the borrower at all; it is insurance to cover only the lender in the event of the borrower’s default. You, the borrower, do not benefit from this insurance in any way. Some people confuse this insurance with mortgage protection insurance, which is insurance purchased through an insurance company to pay off the mortgage in the event of death.
Wow! Is this confusing or what?? Just keep in mind that mortgage protection insurance is voluntary (you are not forced to purchase it) and PMI or MIP are requirements by your lender in order for you to obtain the loan (implying that you don’t have a choice – if you want the loan you must pay the premium). Also, the lender is not going to keep apprised of the value of your home and thus it will be most advantageous for you to inform the lender when the 80% LTV is reached.
To determine whether you can opt-out of this type of insurance you should:
- Compare the value of your home to your current loan amount. This is a number usually referred to as the loan to value (LTV) ratio. If the LTV is less than 80% then you should contact your lender about how to remove this additional fee. Generally you will need some way to get the value of your home. If all that is needed is a CMA or BPO then your friendly neighborhood Real Estate professional can perform that. Or the lender may require an appraisal from a licensed appraiser. The lender will need to specify what means are acceptable.
- Example: You purchased your home for $100,000 and you’ve paid down your loan to $90,000. Now determine the LTV – you must determine the value of the home. If the home is valued at any value greater than 80% LTV or $112,500 then you’ve reached the magic number! [example: $90K /80% = $112,500]
- Call your lender and ask them what you need to do to stop paying PMI! Check with your lender about what source can be used to prove the LTV of your home – in most cases an appraisal by a licensed appraiser is required but some lenders will accept a BPO (brokers price opinion) or CMA (comparable market analysis).
For a great discussion of the 2011 laws related to FHA MIP insurance see: http://www.fha.com/fha_requirements_mortgage_insurance.cfm
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