Why do you need mortgage insurance? The answer to that is that lenders require it. Let’s say you’re buying a new condo and have less than a 20 percent down payment; the lender will ask you to purchase Mortgage Insurance (MI).
MI, also known as home equity, is an insurance policy that compensates lenders or investors for losses due to a mortgage loan default, thereby limiting lenders’ exposure to financial loss.
The cost of MI can be incorporated directly into the mortgage in a process called capitalization. Having MI capitalized the premium becomes an additional tax deduction. Mortgage insurance contracts issued in connection with the purchase of a home after 2006 may be treated as mortgage interest and are therefore generally considered deductible.
How long do I have to pay MI?
You won’t be stuck with MI forever, lenders must write off borrower-paid PMI at 78% LTV (loan-to-value) based on the amortization schedule if the loan is current. If none of the above is done, PMI will automatically terminate at the midpoint of the loan term.
Government-backed loans, such as FHA, will also require MI insurance, but if you want to afford mortgage insurance, we recommend you take a look at the Fannie Mae HomePath loan. The HomePath Loan will not require mortgage insurance. With Homepath’s loan option, you can purchase a condo or home with as little as a 3% down payment without the additional MI costs.
One way to avoid MI is to put a down payment of 20% or more on your new condo or home. Please read the article below on owner occupancy levels and MI requirements.