What is private mortgage insurance and why do I need it?

Conventional loans have advantages that other types of loans do not. Conventional loan interest rates are typically better than other types of loans and there is a certain about of flexibility in terms.

Borrowers can qualify for a conventional loan by putting down as little as 3 percent of the home’s price as a down payment. However, if borrowers put down that percentage, they may be required to take out a private mortgage insurance policy. This is a policy that is paid by the borrower and it protects the lender in case the borrower defaults on the loan.

Borrowers often ask how long the insurance policy needs to be in effect. Some first-time homebuyers think that, similar to drivers paying car insurance for as long as they drive, they will have to pay for private mortgage insurance for the entirety of their mortgage. That isn’t the case. Once borrowers reach a certain level of equity in their homes, they can cancel their PMI.

How to cancel

The first way to cancel is to formally ask your servicer (in writing) to cancel the insurance. The soonest that can happen is when the borrower’s principal balance reaches 80 percent of the home’s value. In other words, once borrowers have paid for 20 percent of the principal on their mortgages, they are eligible to request cancellation of PMI. The loan servicer will have in its records the date a borrower is scheduled to reach 20 percent equity.

The Consumer Financial Protection Bureau states that borrowers can request PMI cancellation earlier if they have paid more than is required on their monthly statement and achieve 20 percent equity sooner than expected. Equity generally means 20 percent of the original sales price “or the appraised value of your home at the time you purchased it, whichever is lower.” If a borrower has refinanced, the principal balance is 80 percent of the home’s appraised value.

If borrowers don’t formally request cancellation of PMI once 20 percent of their principal has been paid, the loan servicer will automatically cancel the insurance once the borrower’s principal reaches 78 percent of the home’s value remains to be paid.

The CFPB states that the final way borrowers can have PMI cancelled is when they reach the halfway point of their loan terms. In other words, if borrowers have a 30-year mortgage, PMI will be cancelled once they reach the 15^th year.

Mortgages can be a little confusing or intimidating. Better Lending is ready to help you understand the whole process so you can get the home you want. Be sure to visit us at www.betterlending.com or call 888-400-1373.