First of all, let's make sure that we mean the same
thing when we discuss "mortgage insurance."
Mortgage insurance should not be confused with mortgage
life insurance, which is designed to pay off a mortgage
in the event of a borrower's death. Mortgage insurance
makes it possible for you to buy a home with less than
a 20% down payment by protecting the lender against
the additional risk associated with low down payment
lending. Low down payment mortgages are becoming more
and more popular, and by purchasing mortgage insurance,
lenders are comfortable with down payments as low as
3 - 5% of the home's value. It also provides you with
the ability to buy a more expensive home than might
be possible if a 20% down payment were required.
The mortgage insurance premium is based on loan to
value ratio, type of loan, and amount of coverage required
by the lender. Usually, the premium is included in your
monthly payment and one to two months of the premium
is collected as a required advance at closing.
It may be possible to cancel private mortgage insurance
at some point, such as when your loan balance is reduced
to a certain amount - below 75% to 80% of the property
value. Recent Federal Legislation requires automatic
termination of mortgage insurance for many borrowers
when their loan balance has been amortized down to 78%
of the original property value. If you have any questions
about when your mortgage insurance could be cancelled,
please contact your Loan Counselor.