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What is Mortgage Insurance and Why Do I Need It?

What is Mortgage Insurance and Why Do I Need It?

Mortgage insurance is something that helps homebuyers get a loan that they might not have otherwise qualified for. It’s designed to protect the lender in case you default on your mortgage, but it doesn’t protect you from the consequences of non-payment. Typically you get this insurance if you put less than 20 percent down on your home. The good news is that it’s not something that lasts the life of the loan and you can eventually refinance to eliminate it from your mortgage.

The Different Types of Mortgage Insurance

Mortgage insurance comes in different varieties and all of them are designed to address a specific need for your mortgage. It all comes down to how much down payment you have on hand when you make a purchase of a home in Philadelphia. You may have heard of private mortgage insurance (PMI), but did you know there are four types of PMI? They include: borrower-paid mortgage insurance, single-premium mortgage insurance, lender-paid mortgage insurance, and split-premium mortgage insurance.

The most common of all of these is borrower-paid mortgage insurance (BPMI). You, the borrower, are responsible for the payment of the premium. The payment is usually added onto your mortgage so you don’t have to make a separate payment every month, but it is notated on your payment as opposed to being added into the mortgage itself. In the event you get an FHA-backed loan, the insurance is paid to the Federal Housing Administration (FHA) instead of a private insurer.

Single-premium mortgage insurance (SPMI) consists of paying the entire premium in one lump sum. You, the borrower, can pay the amount up-front or roll it into the mortgage. This type of insurance costs less, but it’s only beneficial to you if you plan on staying in the home for the life of the mortgage. If you sell the home within a few years of purchase, you won’t get a return on the unused portion of the insurance.

Lender-Paid mortgage insurance (LPMI) means the lender is paying the insurance on your behalf. However, you still pay for the insurance out of your pocket, just not as a separate entry on your mortgage payment. The lender puts a slight increase on the interest to cover the cost of the insurance. LPMI can cost less than traditional PMI, even with the increase in interest rate, and may enable you to borrow more to buy a home.

Split-premium mortgage insurance (SPMI) is the least common of all types of mortgage insurance although it’s an appealing option for those who want to maximize their buying power even with a high debt-to-income ratio. This insurance doesn’t require cash up front, and it won’t increase the premium nearly as much as BPMI. And it can be refunded when the mortgage insurance is terminated.

It’s best to talk to a broker at a Philadelphia mortgage company to learn about which type of mortgage insurance makes sense for your situation. A broker can help you understand how mortgage insurance works and which type is the best fit for you.

Terminating Mortgage Insurance

As previously mentioned, mortgage insurance is required for those who are putting less than 20 percent down on the home they’re seeking to buy. It does increase the amount of the monthly payment, but it doesn’t have to be kept for the life of the mortgage. Depending on the type of mortgage insurance and conditions contained within, the insurance can typically be terminated when the principal payments reach 20 to 22 percent of the original purchase price. It’s for this reason alone that many people decide to take standard BPMI/PMI on their mortgage as opposed to some of the other products that are available.

Eliminating or terminating the mortgage insurance is done in one of two ways: there’s a clause in the policy that it terminates automatically when the principal balance reaches 20 percent or the mortgage is refinanced when 20 percent is reached. Again, talk to a Philadelphia mortgage company or broker to discuss the different types of mortgage insurance and which one is the best for your needs.

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