Is Mortgage Insurance Required?

When you first became a homeowner, you probably heard the word “insurance” a lot. Title insurance, mortgagee title insurance, owner’s title insurance, homeowners insurance, flood insurance, credit insurance, mortgage insurance. Oh my!

Each type of insurance serves an important purpose, but this article will focus solely on mortgage insurance. We’ll describe what it is, whom it protects, whether it’s required for your particular loan, and options for canceling the insurance.

Strictly speaking, mortgage insurance is designed to protect lenders in case borrowers default on their loans. The insurance guarantees that a mortgage lender can stay in business and continue providing loans even if some homeowners face serious financial hardship and fall behind on payments.

Mortgage insurance benefits homeowners, too, in an indirect way. Because of mortgage insurance, lenders can take a bit of a risk in offering loans to people with less money down, which means that more people have an opportunity to buy a home.

Homeowners are responsible for paying the upfront and/or monthly premiums for mortgage insurance. The name for the mortgage insurance, and the way the costs are structured, depend on the type of loan. The type of loan also dictates whether the mortgage insurance can be canceled at some point. Let’s take a closer look at the differences:

What type of loan do I have?

  • Take a look at page 1 of your Closing Disclosure. In the upper right-hand corner of this form, you’ll find the facts about your loan type.
  • The Closing Disclosure was the statement of the loan terms and the closing costs that you received from your lender a few days before you purchase your home.
  • Alternatively, call your servicer and ask for information about your loan.

What type of conventional loan do I have?

Often, new homeowners are willing to pay mortgage insurance because it means having access to an affordable mortgage. Other homeowners may be eager, however, to lower their monthly payments as much as possible and as quickly as possible, and they’re curious if mortgage insurance can be canceled.

As you may have noticed in the chart, mortgage insurance is required for the life of FHA and USDA Guaranteed loans. In other words, mortgage insurance premiums must be paid every month until the loan is paid off. In the case of VA loans, there is a one-time funding fee, paid at closing or that is financed into the loan itself, and there are no monthly premiums. In essence, this fee helps to cover risk on the loans but does not require monthly premiums.

Does this mean that homeowners with FHA and USDA Guaranteed loans are stuck with mortgage insurance forever? Not necessarily. It may make financial sense for some homeowners to refinance and opt for a conventional loan instead, which requires no mortgage insurance if the equity is more than 20% of the value of the home.

Private mortgage insurance (PMI) on conventional loans is only required when the homeowner’s equity in the property is below 20%. A federal law called the Homeowners Protection Act gives homeowners the right to remove PMI under two main conditions5. First, a homeowner can make a written request to their mortgage servicer to have the PMI removed when the principal balance falls to 80% of the original value of the home. Homeowners can decrease the duration of their mortgage insurance by making extra payments toward the principal. Alternatively, the PMI will be automatically canceled when the principal balance is scheduled to reach 78% of the original value of the home.

There are other important conditions to keep in mind about canceling PMI5. First, the homeowner must have a solid payment history and must be current with monthly mortgage payments. Second, the servicer may ask for certification that there are no other liens against the property such as a second mortgage. Finally, the servicer can require evidence that the value of the property hasn’t dropped below the price that was paid for the home. If these three conditions are not met, the homeowner may not be able to cancel PMI until a later time.