Mortgage: The Simple Definition
In its simplest form, a mortgage is a loan used to buy a home or property. Like other loans, each comes with its own interest rate, amortization schedule and other terms. With a mortgage, the home itself is used to secure the loan. This means if the mortgage holder fails to make payments, the home could be repossessed by the lender.
Not all mortgages are built the same, so its important to find a mortgage that works for you and your situation. At the beginning of the application process, you should educate yourself about the following variables:
Federal Home Loan Mortgage Protection
There is an additional type of mortgage insurance. However, it is only used with loans underwritten by the Federal Housing Administration. These loans are better known as FHA loans or FHA mortgages. PMI through the FHA is known as MIP. It is a requirement for all FHA loans and with down payments of 10% or less.
Furthermore, it cannot be removed without refinancing the home. MIP requires an upfront payment and monthly premiums . The buyer is still required to wait 11 years before they can remove the MIP from the loan if they had a down payment of more than 10%.
What Is Homeowners Insurance
Homeowners insurance, also known as home insurance, is coverage that is required by all mortgage lenders for all borrowers. Unlike the requirement to buy PMI, the requirement to buy homeowners insurance is not related to the amount of the down payment that you make on your home. It is tied to the value of your home and property.
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When Is Homeowners Insurance Required
Homeowners insurance typically is required for anyone who takes out a mortgage loan to buy a home. After you pay off your mortgage, youll probably want to continue to have a homeowners insurance policy. While your mortgage lender can no longer require you to carry home insurance after you pay off your mortgage, its up to you to protect your investment.
The Benefits Of An Escrow Account
The biggest benefit of having a Rocket Mortgage® escrow account is that youll be protected during a real estate transaction whether youre the buyer or the seller. It can also protect you as a homeowner, ensuring you have the money to pay for property taxes and homeowners insurance when the bills arrive. Youll find that there are a few other great benefits for home buyers, owners and lenders, too.
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What Is Mortgage Insurance Definition & Working Principle
Mortgage insurance is a type of insurance that protects the lender against losses in case the borrower defaults on their mortgage. Lenders typically require mortgage insurance when borrowers take out loans with less than 20% down payment or have less than 5% equity in their home. This article will explain what is mortgage insurance and how it works.
Is Mortgage Insurance Included In Your Mortgage
Mortgage insurance isn’t included in your mortgage loan. It is an insurance policy and separate from your mortgage. Typically, there are two ways you may pay for your mortgage insurance: in a lump sum upfront, or over time with monthly payments. That said, its not uncommon to have the monthly cost of your PMI premium rolled in with your monthly mortgage payment. This way you can make one monthly payment to cover both your mortgage loan and your mortgage insurance.
If you want to know whether a lender requires mortgage insurance, how you pay it, and how much it will cost, check the loan estimate1 you get from a lender for details and ask questions. You can also do your own research by visiting an online resource such as the Consumer Financial Protection Bureau. Youll want to look for information that explains the closing disclosures on your loan estimate to better understand what PMI may be required, and whether youd pay premiums monthly, upfront or both.
The good news is, if you do need mortgage insurance, you may be able to cancel PMI after you make enough payments on your loan to reach more than 20 percent equity in your home. Check with your lender to find out when and how you can get out of PMI2 when you no longer are required to have PMI.
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Mortgage Insurance Protects The Lender Not You
Mortgage insurance, no matter what kind, protects the lender not you in the event that you fall behind on your payments. If you fall behind, your credit score may suffer and you can lose your home through foreclosure.
There are several different kinds of loans available to borrowers with low down payments. Depending on what kind of loan you get, youll pay for mortgage insurance in different ways:
Types Of Mortgage Insurance And Other Fees
The type of mortgage insurance that youll need depends on several factors, including the kind of loan that you have. Since mortgage insurance is meant to protect lenders, your lender is responsible for choosing the company that provides your mortgage insurance.
Heres how these types of mortgage insurance differ, including when theyre paid and how much they cost.
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Pmi For Conventional Mortgages
Many lenders offer conventional mortgages with low down payment requirements some as low as 3%. A lender likely will require you to pay for private mortgage insurance, or PMI, if your down payment is less than 20%.
Before buying a home, you can use a PMI calculator to estimate the cost of PMI, which will vary according to the size of your home loan, credit score and other factors. Typically, the monthly PMI premium is included in your mortgage payment. You can ask to cancel PMI after you have over 20% equity in your home.
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When Is Mortgage Insurance Required
Typically, you may be required to have mortgage insurance when you take out a mortgage loan and your down payment is less than 20 percent of the purchase amount. The requirement to have mortgage insurance varies by lender and loan product. However, depending on your circumstances, some lenders may allow you to forego PMI even if you make a smaller down payment. Consider asking your lender if PMI is required, and if so, if there are exceptions to their requirement for which you may qualify.
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Escrow Companies And Escrow Agents
When youre buying a home, escrow may be managed by a mortgage servicing company or agent. The escrow agent or company is sometimes the same as the title company.
The escrow company not only manages the buyers deposit, but they may also be responsible for holding on to the deed and other documents related to the sale of the home.
Because the escrow company is working for both the buyer and the seller in the real estate transaction, the fee for their services is usually split evenly between the two parties.
How Does Mortgage Insurance Work
You bear the cost of mortgage insurance, but it covers the lender. Mortgage insurance pays the lender a portion of the principal in the event you stop making mortgage payments. Meanwhile, youre still on the hook for the loan if you cant pay, and you could lose the home in foreclosure if you fall too far behind.
This is different from mortgage life insurance, which pays off the remaining mortgage if the borrower dies, or mortgage disability insurance, which eliminates the mortgage if the borrower becomes disabled.
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Who Should You Get A Pmi From
When you talk with your bank, they usually have a preferredcarrier for mortgage insurance. However, its important to get a secondopinion, especially from anindependent insurance agency, about PMIs, homeowners insurance, and otherpolicies and procedures that can help lower mortgage costs andeven insurance premiums.
Mortgage insurance and homeowners insurance allows you tobuy a home at a more affordable rate. Based on your financial situation,different PMI options are available. To learn more, contact the TJ WoodsInsurance Agency, and well work with you to find out the options that bestbenefit you.
Which Type Of Mortgage Insurance Do You Have
If you have an FHA loan, you have a Mortgage Insurance Premium .
If you have a conventional loan and you put less than 20% down on your home, you have Private Mortgage Insurance .
You can also sign on to Wells Fargo Online® and visit the Escrow Details page of your mortgage account to learn which type of mortgage insurance you have.
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Federal Housing Administration Loan
If you get a Federal Housing Administration loan, your mortgage insurance premiums are paid to the Federal Housing Administration . FHA mortgage insurance is required for all FHA loans. It costs the same no matter your credit score, with only a slight increase in price for down payments less than five percent. FHA mortgage insurance includes both an upfront cost, paid as part of your closing costs, and a monthly cost, included in your monthly payment.
If you dont have enough cash on hand to pay the upfront fee, you are allowed to roll the fee into your mortgage instead of paying it out of pocket. If you do this, your loan amount and the overall cost of your loan will increase.
What Does Fixed Vs Variable Mean On A Mortgage
Many mortgages carry a fixed interest rate. This means the rate will not change for the entire term of the mortgage even if interest rates rise or fall in the future. A variable or adjustable-rate mortgage has an interest rate that fluctuates over the loans life based on what interest rates are doing.
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How Long Do You Have To Buy Private Mortgage Insurance
Borrowers can request that monthly mortgage insurance payments be eliminated once the loan-to-value ratio drops below 80%. Once the mortgage’s LTV ratio falls to 78%, the lender must automatically cancel PMI as long as you’re current on your mortgage. That happens when your down payment, plus the loan principal you’ve paid off, equals 22% of the home’s purchase price. This cancellation is a requirement of the federal Homeowners Protection Act, even if your homes market value has gone down.
Pros Of Mortgage Insurance
Mortgage insurance offers several benefits to aspiring homeowners.
Firstly, it helps you buy a home sooner. Since the average Canadian income hasnt kept pace with real estate prices, it may take years to save for a 20% down payment. Mortgage loan insurance lets you buy a home with as little as 5% down so you can stop paying rent and start building home equity as a homeowner sooner.
Mortgage loan insurance also adds stability to slow economic times, because it helps ensure mortgage funds are available to home buyers. It lowers the risk of lending, and helps borrowers buy homes they wouldnt qualify for otherwise.
In addition, it also helps ensure borrowers get a competitive interest rate on their mortgages. High-ratio mortgages often get better rates than uninsured mortgages.
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How To Get Rid Of Mortgage Insurance
There are downsides to mortgage insurance as well. The biggest minus is that its an extra expense you wouldnt otherwise have to pay. It can also be difficult to get out of if you have an FHA loan without refinance. If youre concerned, there are a few options to get rid of your mortgage insurance.
If you have a conventional loan, you can get rid of mortgage insurance simply by paying down your loan. Under the Homeowners Protection Act, lenders are required to cancel your mortgage insurance once your balance reaches 78 percent of the original purchase price or once you reach the halfway point of your amortization schedule .
You can also request cancellation before the automatic removal once your balance reaches 80 percent of the original value. Some lenders are receptive to this if you are in good standing with your payments.
For FHA loans, the cancelation guidelines depend on your loan origination date. However, for loans that originate after June 3, 2013, you cant cancel your mortgage insurance until your mortgage is paid in full unless you made a down payment of 10 percent or more. In that case, your MIP will end after 11 years.
Lastly, you can try to refinance your mortgage in order to get out of the mortgage insurance, or get your home reappraised to see if it has gained value and the LTV ratio improves. In general, these strategies can work if your home has appreciated significantly since you first took out your mortgage.
Canceling Qualified Mortgage Insurance
Using a conventional loan, the buyer may cancel the PMI once they pay 20% of the loan’s value or after the loan is 11 years old. However, the FHA may not allow you to take this reduction. It depends on the origination date of the loan.
- For loans originated between December 31, 2000, and July 3, 2013, if you have paid at least 78% of the loan-to-value amount off, you may ask the lender to cancel the MIP.
- For loans originated after July 3, 2013, if you made a down payment of less than 10% of the home’s value at loan origination, you must pay the MIP for the life of the loan. The only way to remove the qualified mortgage insurance on an FHA loan is to refinance it into a non-FHA product.
Borrowers who qualify for a conventional loan, even if they will pay private mortgage insurance, should also look at FHA loans to determine which is the better deal. Those with lower credit scores may do better with an FHA mortgage, particularly if they can make a 10% down payment. Also, some lenders may provide a separate loan to cover the down payment amount. Be sure to talk to your tax accountant, financial advisor, and your bank to see which loan makes the most sense for your situation.
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Mortgage Insurance Can Be Divided Into Two Main Categories:
· Loan-to-value or mortgage protection policies help protect the lender when you buy a house with less than a 20 percent down payment. Theyre typically required if you put less than 20 percent down on your home purchase or refinance an existing loan with less than 20 percent equity in your property. Lenders may require LTV mortgages because they want to ensure that all of their money will get paid back if something happens to increase your monthly payment beyond what you can affordlike rising interest rates or unexpected medical billsor decrease the value of your homelike losing your job and having trouble making payments due to insufficient income, divorce, or other financial problems like bankruptcy filings within six years prior .
- LPMI allows you to get financing for more than 80% of the purchase price of your home without having to pay for PMI yourself out of pocket at closing time, which would mean less money in your pocket every month after buying your house! You still need to pay HMFMC upfront if you want to keep any flood protection while still getting an FHA loan, though!
How To Get Rid Of Private Mortgage Insurance
Once you have at least 20% equity in your home, you can ask your lender to cancel your PMI. Once you have 22% equity, the lender is required to automatically cancel the coverage.
However, if you have an FHA loan, mortgage insurance payments will last the lifetime of the loan. But these payments last that long only if you keep the loan through its entiretyyou can still refinance out of an FHA loan into another PMI-free mortgage when you have at least 20% equity.
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Piggyback Mortgages And Pmi
Some lenders recommend using a second piggyback mortgage to avoid PMI. This can help lower initial mortgage costs rather than paying for PMI. It works like this: You take out a first mortgage for most of the homes purchase price . Then you take out a second, much smaller mortgage for the remainder of the homes purchase price, less the first mortgage and down payment amounts. As a result, you avoid PMI and have combined payments less than the cost of the first mortgage with PMI.
However, a second mortgage generally carries a higher interest rate than a first mortgage. The only way to get rid of a second mortgage is to pay off the loan entirely or refinance it into a new standalone mortgage, presumably when the LTV reaches 80% . However, these loans can be costly, particularly if interest rates increase from the time you take out the initial loan and when youd refinance both loans into one mortgage. Dont forget youll have to pay closing costs again to refinance both loans into one loan.
Private Mortgage Insurance Premiums
PMI has different payment plans to satisfy both homeownersand lenders. Before deciding which payment plan is right for you, there aresome factors that affect your premiumprices:
- Loan-to-ValueRatio: Mortgages must be insured if the loan to value ratio is between 80%to 97%, and depending on the LTV, it will affect what the price will be for thepolicy.
- Two people may pay the samedown payment on a home. However, theircredit scores determine the cost of theirmortgage insurance policies.
- PMI RateAdjustments: A loan amount greater than $400,000, and mortgages on secondhomes will increase your PMI rate.
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