What is mortgage insurance and when is it required?
Mortgage insurance is protection for the lender (not the borrower) in the event of default. The mortgage insurance company will reimburse the lender for all or part of losses they may have if the home is foreclosed on and must be sold by the lender. If your down payment is less than 20 percent, or you are refinancing more than 80 percent of your home's value, most lenders will require that you purchase mortgage insurance. Typically, mortgage insurance is not required for home equity loans. Although mortgage insurance is primarily for the benefit of the lender, it does allow homebuyers to purchase their home with a low down payment. The borrower pays the mortgage insurance premium on behalf of the lender.

The terms and conditions for mortgage insurance have changed several times in the last decade, particularly for private mortgage insurance. For current guidelines on maximum loan amount, loan-to-value (LTV) ratio, mortgage types and premiums, you should consult with a lender.

There are many different options that lenders can offer you to pay the premium for mortgage insurance. The most common method is by adding a small premium amount to each monthly payment, called a monthly premium. Lenders can also offer a single premium that will require you to make a large payment at closing rather than adding the premium to your monthly payments.

Depending on the type of premium used, you may be due a refund of some of the premium paid if your loan is paid in full early.

If you are planning to keep your mortgage for only a few years, the monthly premium plan is probably the best deal. If you are planning to keep your mortgage for several years, look into a one-time premium.
Canceling Mortgage Insurance Payments
The lender may allow you to discontinue the PMI premiums when your loan-to-value (LTV) declines below 80 percent. This can happen in two ways:
  1. Several years of monthly principal payments will reduce your loan balance and your LTV ratio.
  2. If the value of your home goes way up, your LTV ratio goes down. An appraisal will be required to verify the new value and lenders will require that you pay for it.

Recent Legislation
As of July 1, 1999 new federal legislation provides for the following private mortgage insurance (PMI) reforms:
  1. Automatic termination of PMI will occur for most borrowers when their loan balance has been amortized down to 78% of the original property value.
  2. Borrowers with good payment records will be able to request cancellation of PMI when their principal balance has been paid down to 80% of the original property value of the house. Borrowers may be able to demonstrate their 20% equity by submitting a current appraisal at their own cost.
  3. Some borrowers, whose loans are deemed "high risk" may not be able to get rid of PMI payments until midway through the loan's life; 15 years for a 30-year loan, for example.
  4. Lenders must make borrowers aware of these new rights on a regular basis.
Important: Do not confuse mortgage insurance with mortgage life insurance. Mortgage life insurance is an optional life insurance policy that pays off your mortgage in the event of your death. It can be purchased from your lender or your insurance agent.
 
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