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    Mortgage Insurance Information

    What is mortgage insurance?

    Why do I need mortgage insurance?

    These are all questions that you may be asking yourself. If you have a down payment for your house that is less than 20% of the sale price, you have to have mortgage insurance. It is sometimes called private mortgage insurance or PMI. The cost is usually about one-half of one percent of the loan, but can range from 0.25% to 2%. The rate you pay can also be affected by the amount you put down on your loan and your credit score.

    Mortgage insurance has been around for a long time.

    It began in the United States in the 1880s. The first law passed on it was in New York in 1904. The real estate market was entirely bankrupted after the Great Depression, and by 1933, no private mortgage insurance companies even existed. The modern form of private mortgage insurance was created by Max H. Karl, a Milwaukee lawyer in the 1950s. He raised $250,000 from friends and investors and founded the Mortgage Guaranty Insurance Corporation (MGIC). MGIC would only insure the first 20% of the loss on a defaulted mortgage. This was enough incentive for lenders across the nation to start issuing mortgage loans to buyers. This wide availability of credit helped to boost the building boom of the 1960s and 1970s.

    There are two types of PMI and it only applies to conventional loans.

    A conventional loan is one that is not guaranteed by the government. There are also six major PMI companies in the United States. Borrower-paid private mortgage insurance or BPMI is a default insurance on mortgage loans. This allows borrowers to secure a loan without having 20% down.

    You can request that your PMI be cancelled once you have paid down your loan to a certain level. This date is when the loan is scheduled to reach 78% of the original sales price. The law requires that home mortgages signed on or after July 29, 1999 to terminated PMI once the homeowner reaches 78% of the loan-to-value. This was set up in 1998 with the Homeowners Protection Act of 1998.

    You can also request the termination of your PMI once you gain 20% home equity. If you make extra mortgage payments or your property value increases, you may be able to submit a request for cancellation even quicker. There is also lender-paid private mortgage insurance or LPMI. It is similar to BPMI, but it is paid by the lender.

    The borrower pays the premium of the loan and the lender is the beneficiary. It protects the lender against default by the borrower. The PMI ensures that the lender will be paid in full if the borrower defaults. Your mortgage insurance may be capitalized into a lump sum payment when you get your loan or be a typical pay-as-you-go premium payment.

    There are ways that you can avoid PMI.

    If you pay a higher interest rate on your mortgage loan, some lenders will waive the mortgage insurance. Also, you do not need to carry it if you put at least 20% down on your loan. But, there is a way to avoid PMI by putting no money down. You would have to use a combo loan. If you keep your first loan at 80% loan-to-value or less and then add a second loan of 20% or less, you can get a loan without having PMI. Some home owners get a second mortgage to avoid high interest rates and PMI. This will cause you to have the associated fees with the second mortgage and you will have to make two payments a month.

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