A lesser known type of mortgage insurance is the type that pays off your mortgage in case you die. You pay a small premium for a small chance of dying. You probably could get better protection through a life insurance policy. The type of mortgage insurance most people carry is the type that insures the lender in the event the borrower stops paying the mortgage. That's right, private mortgage insurance insures your lender.
Why Do You Pay for Private Mortgage Insurance?
Many borrowers take out private mortgage insurance (PMI)because their lender requires it. The lender requires it because the borrower is putting down less than 20% of the sales price as a down payment. The less a borrower puts down, the higher the risk to the lender. So, the lender wants insurance against a default.
You don't choose the mortgage insurance company and you can't negotiate the premiums. It sounds almost unAmerican, doesn't it? But that's the way it works when you get a mortgage that exceeds 80% loan-to-value.
If you put down 5%, for example, on a $200,000 home and stopped making your mortgage payments, mortgage insurance would pay your lender $30,000, which is the 15% that you did not put down to protect the lender to an 80% LTV. This would happen after foreclosure.
FHA charges for mortgage insurance as well. Not only do you pay an upfront premium for mortgage insurance, but you pay a monthly premium, along with your principal, interest, insurance for property coverage and taxes.
How Do You Cancel Private Mortgage Insurance?
Once your equity rises above 20%, either through paying down your mortgage or appreciation, you might be eligible to stop paying PMI. The first step is to call your lender and ask how you can cancel your private mortgage insurance.
The lender will want proof that your equity position is secure and exceeds 20%. It will get that proof by requiring you to pay for an independent appraisal. You don't get a voice in choosing the appraiser or the amount that the appraisal will cost you, but it will probably cost between $350 and $500.
FHA rules are different. If you have an FHA loan, you will need to pay down your mortgage to 78% of your original sales price. Even if appreciation has pushed your equity up, it won't matter. You will need to reduce your original principal balance.
How Can You Avoid Paying for Private Mortgage Insurance?
There are many ways to avoid paying for private mortgage insurance. You may not necessarily qualify for these nor want to do any of them.
Realize that there is never a guarantee that your loan will not contain MI if your equity is less than 20% because lenders can pay for MI without your consent or knowledge