Specializing in Southern Orange County

What is mortgage insurance?

 

Mortgage insurance is something that you will most likely have to pay for if you have less than 20% equity in your property. In the bank’s eyes the less equity that you have in your property, the higher your risk of foreclosure.

Now because of this, banks will usually require you to pay insurance for your mortgage in addition to your monthly mortgage payment. The mortgage insurance company, that you are paying, helps to insurance the lender for a portion of the loan amount, in the event that you default on your loan, and the value of the property isn’t enough to pay the lender back the amount that you owe them.

Now generally the way it works, is that the less equity you have in property, the more you will have to pay in terms of mortgage insurance, because again you’re at a greater risk of foreclosure in the bank’s eyes.

Now if you have 20% equity in your property, you shouldn’t have to worry about this, and you can actually request from the lender that holds your note, to cancel your mortgage insurance payments, once you have 20% equity. Once you have 22% equity, the bank actually has to cancel these mortgage insurance payments as well.

Now for those who don’t have 20% equity in their property, there are couple of ways around having to make these extra payments. One method is the 80/10/10 loan. Where 80% of the property value is on a first loan, 10% of the property value is on a 2nd loan which is usually a Home Equity Line of Credit, and the other 10% would represent your down-payment if you’re purchasing, or equity in the property if you’re refinancing. With this particular loan structure, you would not have to pay mortgage insurance, which could save you several 100 dollars a month, depending on how much you’re paying on it.

Another way is to apply for an LPMI loan. LPMI stands for “Lender Paid Mortgage Insurance.” Now this sounds pretty cool, because the lender is actually paying for your mortgage insurance. However, keep in mind that the downside to this is a higher interest rate. Usually about .375% higher than what you would be quoted on a loan where you would be paying mortgage insurance. The only way to really figure out if this is the way to go, is to call a loan officer, like me, 🙂 and have them give you a comparison between an LMPI and a non-LPMI loan product to see which has the lower payment.

Now if you’ve recently gotten an FHA loan, then there’s a good chance that you are going to have pay mortgage insurance for the life of the loan, regardless of how much equity you have in the property. If you find yourself in this situation, then you’ll most likely have to refinance into a conventional loan to get rid of the mortgage insurance payments.

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