What is “mortgage insurance”? Does it affect me? Mortgage insurance, commonly known as “MI”, is insurance on your mortgage. In other words, basically it is insurance payable to a lender and is used to offset any losses in the event that you, as the borrower, are not able to repay the loan AND the lender is not able to recover its losses in the event of a foreclosure. Just like life insurance, which depends on the insured’s health, age, etc., or automobile insurance, which depends on the vehicle, the owner’s driving record, etc., MI depends on the loan’s loan-to-value (LTV), the loan term and type, the coverage amount, and how often the payments are made. The majority of loans under $729,750 with an LTV greater than 80% require mortgage insurance. And the cost of mortgage insurance is determined by the loan amount, LTV, occupancy, credit score of the borrower, etc. One option that borrowers may use, in the event that the loan’s LTV is greater than 80%, is a 2nd mortgage rather than pay for mortgage insurance. Your loan agent can work with you on explaining this.
Depending on the plan, the MI may be payable up front when your loan closes, or it may be capitalized onto the loan in the case of single premium product. Once the LTV is reduced to less than 78%, or less, based on the original appraised value or purchase price, either through paying down the principal or the home appreciating, the MI is often no longer required. This can occur via the principal being paid down, via home value appreciation, or both. The company or person servicing the mortgage usually makes the request. Some programs involve the lender paying for the MI rather than the borrowers, and may involve adjusting the original interest rate of the loan to cover those costs. FHA loans also have mortgage insurance, so it is not restricted to only conventional (Freddie & Fannie) loans.
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