The following is a guest post. Enjoy!
What is Private Mortgage Insurance?
Private mortgage insurance is an insurance product that is taken out by a borrower, but is payable to the lender. It is insurance designed to offset losses in the case where a borrower isn’t able to repay the loan and the lender worries that it may not be able to recover its costs after foreclosure and sale of the property.
Private mortgage insurance is typically used in situations where the borrower isn’t able to put enough down to satisfy the lender’s risk requirements.
When You Need Private Mortgage Insurance
Private mortgage insurance is used when the lender believes there will be risk in recouping the cost of the loan. This typically applies when the down payment is less than 20% of the appraised value. However, it can also change based on the loan term, loan type, total amount financed, and more variables. It also is not needed for many government-backed loans, like FHA, since the loan is insured against loss by the government rather than the homeowner.
How Private Mortgage Insurance Works
Private mortgage insurance is typically required by lenders when there is not an 80% loan-to-value ratio on the property. If you don’t meet this criteria, you will need to purchase private mortgage insurance.
Private mortgage insurance typically costs around $55 per month for each $100,000 financed. Usually, your loan servicer will provide a list of qualified mortgage insurance providers, and you will need to select one and have the policy in place upon close of escrow.
You can cancel your private mortgage insurance when your loan has an 78% loan-to-value ratio. This can occur either by principal repayment, or by the house appreciating in value (or both). Only the servicer can decide if the 78% ratio has been reached, but you can ask them for an appraisal if you think it has been made.
A great thing is that, since 2007, private mortgage insurance premiums are tax deductible, just like mortgage interest. This made it cheaper for borrowers to get private mortgage insurance, instead of having to rely on complex financing.
How about you all? Do you currently have insurance on your home mortgage loan? If so, does it provide you with any additional benefits aside from the implied financial protection?
Share your experiences by commenting below!
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