Q & A
- What is private mortgage insurance?
- How can private mortgage insurance benefit homebuyers?
- If a borrower doesn’t have a 20 percent downpayment, but has good credit and can meet the monthly mortgage payments, is the lender still likely to require mortgage insurance on the loan??
- Who pays for private mortgage insurance?
- How will private mortgage insurance affect a borrower's monthly mortgage payment?
- Can private mortgage insurance be cancelled?
Q: What is private mortgage insurance?
A: Private mortgage insurance is a type of guaranty that protects lenders against certain losses and costs resulting from foreclosure.
Q: How can private mortgage insurance benefit homebuyers?
A: Since the lender has some protection in the event that the borrower defaults on the loan, private mortgage insurance makes it more likely that lenders will provide loans to homebuyers who need to purchase a home with a lower downpayment. With private mortgage insurance, a borrower can purchase a home with as little as 3% down or even less in some cases.
Q: If a borrower doesn’t have a 20 percent downpayment, but has good credit and can meet the monthly mortgage payments, is the lender still likely to require mortgage insurance on the loan?
A: Most likely, the lender would still require mortgage insurance. Most lenders require mortgage insurance for loans with a downpayment under 20 percent.
Q: Who pays for private mortgage insurance?
A: The lender pays for private mortgage insurance, but usually passes on the cost to the borrower by adding it to monthly principal and interest payments.
Q: How will private mortgage insurance affect a borrower’s monthly mortgage payment?
A: Private mortgage insurance premiums vary and are based on the amount and terms of the mortgage, among other factors.
Q: Can private mortgage insurance be cancelled?
A: Yes, borrower-paid private mortgage insurance is cancellable.* Currently, the decision on when to allow private mortgage insurance coverage to end does not depend solely on the degree of equity in your home. It may depend on a number of factors, including the degree of equity in your home, your mortgage payment history, the current value of your home and applicable federal and state law. However, in many cases, private mortgage insurance may be canceled when the mortgage balance reaches 80% of the original property value. For many loans that close on or after July 29, 1999, private mortgage insurance will automatically terminate when the outstanding principal balance is scheduled to reach 78% of the original property value. In addition, many lenders will allow a borrower to cancel private mortgage insurance if the loan-to-value ratio on the property reaches 75% through appreciation.
* Subject to the Homeowners Protection Act, applicable state law and, in certain cases, lender- specific guidelines.
