What is a mortgage insurance premium? Do I need this?

Keith Gumbinger

Q: What is a mortgage insurance premium? Do I need this?

A: If you are looking at your mortgage bill or statement, you may see a charge for a "mortgage insurance premium." In general, this will be the cost you must pay for a policy which helps to protect your mortgage lender against any loss which may occur if you don't make the payments on your loan (default) and your home goes to foreclosure..

All loans where the borrower has less than a 20 percent down payment or a 20 percent equity stake must have mortgage insurance in order to be eligible to be backed by Fannie Mae or Freddie Mac. Policies attached to these mortgages are often called Private Mortgage Insurance (PMI), since private companies issue the policies. The FHA also has mortgage insurance, but is a self-insuring pool, and all borrowers must contribute an up-front premium as well as regular premiums.

Even if it isn't sold or backed by Fannie or Freddie, most conventional loans will conform to their underwriting requirements for private mortgage insurance.

Even though your loan may require it today, you won't be seeing a cost for a mortgage insurance premium on your mortgage statement forever. For conventional and conforming loans, PMI policies will automatically discontinue once you've paid your loan down to 78% or the original loan balance relative to the original value of your home (a 78% Loan-To-Value ratio). While this can take rather a long time, many lenders will allow you to cancel your mortgage insurance after just a few years once a combination of loan amortization and home price appreciation puts your current LTV at 80% or less. This often requires that you have made all your payments on time and are willing to pay for an appraisal to verify the current value of the home.

You can find out when your PMI policy will automatically cancel by using HSH's PMI Calculator.

FHA-backed loans have very different rules regarding cancellation, and borrower with small down payments who selected an FHA-backed loan after April 2013 will not be able to cancel their mortgage insurance premium -- it will run for as long as they have the mortgage.

There's a lot to know about Private Mortgage Insurance, and mortgage insurance premiums, different kinds of MI, canceling PMI policies, and more. You can learn everything you need to know about mortgage insurance in HSH's comprehensive Guide to Private Mortgage Insurance.

There is a kind of debt or "mortgage life" insurance which is sometimes confused with MI. These are policies which pay part of or even all of the mortgage if you become unemployed, injured or should pass away. These are voluntary policies, and they would be added on to your mortgage payment in addition to any mortgage insurance premium you are required to pay.

Ask the expert
Keith Gumbinger
Keith Gumbinger
Mortgage Expert
Vice President, HSH.com
About Keith: Mortgage market observer and analyst with 35 years experience... (more)
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