Mortgage Tips: When/Why Do I have to Pay Mortgage Insurance?

When it comes to buying a home and getting a mortgage, there are a ton of elements that go into this. It is more than just finding the home and getting approved for the loan. There are also various other fees to consider. One of these is the mortgage insurance. As an experienced REALTOR® and licensed mortgage broker, I find that this can be a surprise to many people, as they were unaware that such a thing existed.

What is Mortgage Insurance?

Just what is mortgage insurance? This is considered a financial guaranty for the lender. It is meant to help reduce or eliminate the loss for the lender. It is almost always included in the payback of your loan. Especially if you are putting down less than twenty percent on the home or are refinancing up to eighty percent more than your home value.

Why is this Needed?

You do not have a choice when it comes to mortgage insurance. This is something that you will have to have. But, why is this needed? Without the mortgage insurance, many lenders would simply not accept the risk of letting you borrow the money. Essentially, if it were not for mortgage insurance, chances are you would not get approved for a loan, nor would anyone else! The good news for many is that the mortgage insurance that you pay each month can often be taken off of your taxes.

When is Mortgage Insurance Paid?

Mortgage insurance is often included in your payments. When you make a payment each month, a certain percentage of this is going to the principal balance, the interest, into an escrow account and then to the mortgage insurance. However, how long do you have to pay this? This is going to depend upon the wording of your agreement with the lender. But, the standards for this includes:
  1. This mortgage insurance must be paid the entire first year of the mortgage
  2. For those with an FHA guaranteed loan, the mortgage insurance has to be paid for the first 5 years of the loan
  3. When the loan balance drops down to 80% of the original purchase price, most people can request that this mortgage insurance no longer be paid. However, the lender will be the final one to determine if this is possible or not.
  4. Many loan companies have to remove this mortgage insurance premium when you drop down to 78% of the total purchase price.
It is best for you to look at your mortgage documents to see the wording and requirements for this mortgage insurance.
While many people think that this mortgage insurance is just another way to get more money to the lender, it is what helps people to get the loan for their home in the first place. Therefore, while it may seem that you are wasting money, it is worth it for you and the lender in the end. Be sure that if you are looking to buy a home, that you consider this cost in with your monthly payment as well. However, rest assured, I am here to help make this a smooth and easy process and can make sure you’re fully informed on the best packages and rates available from a variety of lenders. Your financial profile and mortgage needs change over time, and entering the market to purchase a new home is an excellent time to re­consider your options.

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