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Mortgage Refinancing

Mortgage Insurance for Your Home Loan

by Meiling Hunter
CMR Columnist

You buy car insurance, flood insurance, and life insurance to protect both you and your belongings. With mortgage insurance, strangely enough, you pay for it, but it's the lender who enjoys the insurance protection with no tangible benefit to you.

Why am I required to pay mortgage insurance on my home loan?

Whether you are refinancing or looking to buy a new home with less than a 20% down payment (or equity), you are most likely going to have to pay mortgage insurance. The sole benefit of mortgage insurance to you, the borrower, is that it makes lenders willing to give you a home loan with a down payment smaller than 20% of the purchase price or appraised value. The risk of default and loss to the lender is greater on mortgage loans with smaller down payments. Mortgage insurance provides protection for the lender in the event that you default on your home loan.

How can I avoid paying mortgage insurance?

Virtually all mortgage loans with less than a 20% down payment require mortgage insurance in the U.S. There are two ways that lenders can help you sidestep paying mortgage insurance when refinancing or purchasing a new home:
  • Opting for two mortgage loans. Many lenders offer a first and second mortgage in lieu of one mortgage. For example, if you put 5% down on your home, your lender might offer you an 80/15. The first mortgage would be 80% of your total home loan and your second mortgage would be 15% of the total amount. Remember, second mortgages typically carry a much higher interest rate than first mortgages.
  • Offering you a higher interest rate. If you choose this option, the lender pays the mortgage insurance, typically at a lower rate than you would get. This is also advantageous come tax season because mortgage interest paid may be tax deductible, while mortgage insurance isn't.

Do I have to pay mortgage insurance for the entire life of my home loan?

No, mortgage insurance is not required to be paid for the entire duration of your home loan. In 1999, Congress mandated that mortgage insurance must be cancelled at the borrower's request if the loan balance is paid down to 80% of its original property value. Additionally, mortgage insurance must be cancelled automatically once the balance is 78% of its original value.

About the Author
Meiling Hunter has worked in the mortgage industry for four years. She graduated from the University of California, Davis, with a double major in Economics and Philosophy.

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