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Residential mortgage insurance: What you need to know

Private Mortgage Insurance or PMI is a type of residential mortgage insurance that you need to purchase if you’re unable to make 20% down payment on your home. It actually protects the lender from loss if a borrower defaults on loan repayment. Usually, a borrower needs to purchase a PMI; however, a lender may also purchase a Private Mortgage Insurance and add the premium cost to the interest of the mortgage loan.

What is meant by a residential mortgage transaction?

It is said to be a residential mortgage transaction if it satisfies the following 4 factors.

1. The mortgaged property is a single family dwelling. 2. A deed of trust or a mortgage deed is retained or created. 3. The mortgaged property is the primary residence of the borrower. 4. The purpose of the mortgage transaction is to acquire, construct or refinance a house.

What is Homeowners Protection Act of 1998?

Homeowners Protection Act of 1998 is a law designed to reduce the unnecessary payment of PMI by a homeowner, who doesn’t require paying it any more. According to this Act, your PMI will automatically get terminated as soon as you’re able to build equity worth 20% down payment on your home. This Act is applicable to loans that are obtained before July 29, 1999. It is also not applicable to FHA and VA loans. However, you may ask your lender to cancel PMI as soon as you build 20% equity on the mortgaged property.

How can you avoid paying Private Mortgage Insurance?

You can avoid purchasing residential mortgage insurance even if you initially pay less than 20% down payment on your home. Check out the following ways to find out how you can avoid purchasing PMI.

• Borrow the required amount: It is one of the easiest ways to avoid PMI. Borrow the required amount from your relatives or friends. It will help you to save interest on the loan.

• Pay more interest: If you pay more interest on your mortgage, then you can do without purchasing PMI. Your lender may waive off PMI if you agree to pay more interest on your home loan.

There is another type of residential mortgage insurance that you may purchase in order to cover your home loan payments in the event of your temporary unemployment. Owing to the coverage it provides, this insurance is referred to as mortgage protection insurance or mortgage payment protection insurance. Apart from covering the monthly mortgage installments when the borrower is unable to make the required payments, mortgage protection insurance pays off the remaining home loan in the event of the borrower’s death. Thus, it saves the borrower’s family members from losing their primary residence.