What Is Mortgage Insurance – Do I Need It?

Mortgage insurance is required of borrowers who don’t have a 20% down payment for a home. Mortgage protection insurance safeguards the lender if a borrower falls behind on mortgage payments. Insurance benefits buyers who don’t have a 20% down payment because the extra security it offers to lenders makes it easier to get a loan, but it is important to know that mortgage insurance only protects the lender, never the borrower. Buyers who fall behind on mortgage payments still run the risk of losing the home through foreclosure, even if they’ve been paying mortgage insurance.

What Is Private Mortgage Insurance (PMI)?

Private mortgage insurance is available to borrowers who get a conventional loan. Lenders require this insurance as a way to secure their interest in the loan. PMI is only available to those who get a loan through a private lender, not a federal loan backed by the FHA. Most borrowers who secure a federal housing loan without putting down 20% also need mortgage insurance, but the terms and stipulations for this insurance differ from PMI. Federal insurance rates are usually higher, and sometimes buyers are stuck with the insurance for the life of the loan, even after they’ve built equity in the home.

How Much Is Private Mortgage Insurance?

PMI mortgage insurance rates vary and depend on your down payment and credit score. Often, PMI is added to the monthly mortgage payment. As you pay down the principle over time, your PMI gradually lessens. Many lenders reevaluate your loan standing and adjust the PMI amount annually.

Is Mortgage Insurance Tax Deductible?

Mortgage insurance is currently tax deductible through the end of 2016, as long as the insurance contract was issued after 2006. This deduction was created as part of the Tax Relief and Health Care Act of 2006. It was set to expire in 2015, but Congress extended it for the 2016 tax year, and Congress must pass another renewal for it to remain in effect beyond that time. In order to take advantage of this deduction, you must itemize your tax return. Additionally, the deduction is only available for those with a maximum adjusted gross income of $109,000 married filing jointly or $54,500 filing separately.

How Much Does Mortgage Insurance Cost?

Private mortgage insurance can cost as much as 0.5% to 1% of the loan amount annually. This means that if you purchase a $300,000 home with 1% PMI, you’ll pay $250 per month on PMI alone. That hefty price tag is one reason many buyers try to save for the 20% down payment ahead of time or pay down the principle balance quickly.

How to Get Rid of Mortgage Insurance

Once the total equity of your home reaches 20% and your principle balance is 80% of the home’s worth, you can ask your lender to remove the mortgage insurance. In many cases, this does not happen automatically. Buyers must keep track of their payments and request that the lender remove the PMI. There are certain criteria you must meet to cancel the PMI at this stage.

  • You must put your request in writing.
  • You must be current on your payments and have a good payment history.
  • Your lender may require that there are no secondary liens, such as an additional mortgage on the home.
  • Your lender may also require an appraisal to show that your property hasn’t decreased in value to ensure that the home’s equity is indeed 20%.

If you are unable to cancel your PMI once your principal balance reaches 80%, or you forget to request the termination, your lender is required to automatically terminate your PMI once your principle balance reaches 78% of the original balance on your home. For this to happen, it is necessary for you to be up to date on your payments.

Mortgage Insurance Premium

If you want to purchase a home but are unable to come up with 20% down, then mortgage insurance is something you should expect. Although it may cost as much as several hundred dollars per month, the mortgage insurance premium deduction can help defray the cost come tax time.

Mortgage Insurance Companies

Most mortgage insurance comes directly through the loan originator, so you don’t have to worry about applying for this separately from your mortgage. There are mortgage insurance companies that supply this insurance directly to lenders; most lenders have an approved list of insurers they rely on to provide PMI.

Radian Mortgage Insurance

The Radian company is a popular insurance provider, offering several mortgage insurance products and services to help lenders reach a variety of customers. It gives lenders the ability to offer financing to buyers with as little as 3% down. Radian is one of many insurance providers that work to make purchasing a home a realistic option for those who don’t have a large chunk of money for a down payment.

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Published September 8, 2016
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