The idea behind mortgage insurance is relatively simple: an insurance entity agrees to insure against default on a loan in exchange for premium payments made by you. So – you pay the premiums and should you default, the insurance company will actually pay your lender.

Usually this is the point where people ask “do I have to pay mortgage insurance?” and the answer is — no, not if you put enough money down and pick the right loan program.

On conventional loans, the insuring entity is usually a “private” mortgage insurance company and on FHA or government loans, the insurance company is FHA. Regardless of who you make your mortgage insurance payments to, do not be confused and think you are making mortgage insurance payments to your lender – you are not. The entity that you are making your mortgage insurance payments to is an insurance company (or the government) and is not a lender.

Conventional loans use Private Mortgage Insurance – also known as PMI

When you buy a property using conventional financing, you will be required to put down a 20% down payment or purchase private mortgage insurance. When you have mortgage insurance on conventional loans, you can usually get your lender to drop your private mortgage insurance once you reach a 20% equity point in your property – and conventional loans allow for property appreciation when making the calculation.

If you think that you have 20% equity in your property and want to stop paying monthly private mortgage insurance, the first step is to contact your lender. Each lender has different procedures in place, but normally you can expect to get an appraisal done on the property and have some kind of form to fill out and submit to the lender. Specific questions about the process should be directed to your current lender because each lender is slightly different in their requirements for dropping PMI.

Lender Paid Mortgage Insurance

For conventional loans, there is also something called LPMI – which is short for Lender Paid Mortgage Insurance. The way that Lender Paid Mortgage Insurance works is that the lender agrees to pay the Private Mortgage Insurance in exchange for a slightly higher interest rate. LPMI programs were very popular a couple of years ago, now they are fairly rare to find.

FHA loans use Mortgage Insurance underwritten by the Federal Housing Administration

The way that mortgage insurance works for FHA loans is really in two parts: 1. Up Front Mortgage Insurance Premium (also known as UFMIP) and then Monthly Mortgage Insurance (also known as MMI or MI). Up front mortgage insurance premium is usually 1.5% – 3% of your loan amount (depending on which FHA program you are participating in) and is required to be paid up front, although it can be financed into the loan. The Up front mortgage insurance premium is amortized over a period of 5 years and should you refinance into a new FHA program during those 5 years, FHA will allow you to use whatever is left in your UFMIP account as a credit towards setting up a new loan.

FHA monthly mortgage insurance is figured at a factor of .55% of your loan amount paid monthly. So for a $100,000 FHA loan, the annual monthly mortgage insurance due would be $550 and it would be paid monthly – or about $46 per month. FHA monthly mortgage insurance must be paid until you have paid down the loan to 80% of what was originally borrowed – it does not factor in property appreciation at all. So if you borrowed $100,000 originally, you would be required to pay monthly mortgage insurance until you reached a loan amount of $80,000.

Popular Loan Programs That Don’t Require Mortgage Insurance

Not all loan programs require mortgage insurance – some of the popular loan programs that do not require any mortgage insurance include:

• VA loans
• USDA loans
• Home Path loans

Is mortgage insurance a bad thing? Not really. When you purchase mortgage insurance, you can actually buy more home than you otherwise would be able to afford – because it increases your buying power. First-time buyers can use a low down payment to help them afford their first home, or to purchase a more expensive home sooner. Repeat home buyers can put less money down and gain significant tax advantages because they will have more deductible interest to claim. They can also use the cash they would have used for a large down payment for investments, moving costs or other expenses.

But did you know that there is more to your monthly mortgage payment than just your principal and interest?

In mortgage-speak, you will sometimes hear the acronym “PITI” which stands for Principal, Interest, Taxes and Insurance. While many people focus on trying to save money with getting the lowest rates and fees on their loan, don’t overlook the opportunity to save possibly hundreds of dollars on your loan with taxes and insurance as well.

Principal and Interest
Principal and Interest is the amount of money that you pay towards the principal balance of the loan each month and the interest that is associated with that principal at a given interest rate. The principal and interest portion of your payment is just s simple math calculation that arrived at using the interest rate of your mortgage note, the principal amount of your loan and the number of years your mortgage is amortized for.

Taxes
Here is a relatively little-known piece of information – you may be able to save money on your annual tax assessment if the value of your property has went down down. If your property value has gone down and you think that the county assessors office has not accurately reflected this in your tax bill, there are processes in place where you can appeal the amount of taxes that are to be due. Check with your local county assessors office to see what the appeals process is if you want to contest the assessed value of your property because you think it has went down recently.

Insurance
There are two types of insurance: homeowners insurance and mortgage insurance. The best way to save money on your homeowners insurance is to shop around using a homeowners insurance quote service that will possibly help you pay less each month by finding a provider who can give you the same coverage you are getting now for less. You might be surprised how much you can save just by shopping around a little bit for the best deal.

Mortgage Insurance. Mortgage insurance is the money that the lender requires you pay if you are below a certain loan-to-value ratio on your home. The best way to save on mortgage insurance is to work toward getting enough equity in your property that the lender will no longer require it on your loan. How much you pay for mortgage insurance has to do with how much equity that you have in the property — more equity means that you will pay less for mortgage insurance. If you put as little down as possible, you will pay more for mortgage insurance.

Remember – when shopping for a mortgage, there is more to saving money each month than just getting the lowest “PI” possible — don’t forget to shop for the “TI” part as well, you might be surprised how much you can save!

• Standard annual premium—This option requires that a certain amount be paid at closing, usually the total cost of the first year of insurance.  Some borrowers like the standard annual premium because they get the insurance cost out of the way in the first year, and the renewal in the second year and beyond often leads to lower monthly payments.  Some companies offer tax benefits for choosing this plan as well.

More thoughts

Remember, mortgage insurance is designed to get buyers into homes faster by avoiding a large down payment.  Keep in mind the following when you’re choosing a certain type of mortgage insurance:

• The home loan amount
• Estimated monthly payments
• Local housing trends

With careful consideration of your personal circumstance, along with the benefits and disadvantages of each type, you can choose the mortgage insurance that is right for your home.

Each homebuyer is unique, and purchasing mortgage insurance is no longer a cookie-cutter, one-size-fits all industry.  From buyers that are cash-strapped to those looking to trade up, there are several mortgage insurance programs to consider.

• The Finance Single Premium Option—With this option, you pay the insurance during the closing with one payment.  Simply put, you’re financing some of the mortgage insurance with the loan amount.  Therefore, the single premium mortgage insurance stays with the loan until it is paid in full, since it has become part of the loan.  Nonetheless, some homebuyers see this option as a plus because it gives tax benefits and could lead to lower monthly payments.  The premium is also refunded if you get no longer need the mortgage insurance or sell the house.

• Lender Paid Mortgage Insurance–In this option, (sometimes called the “no mortgage insurance” option), the lender pays the mortgage insurance premium for the borrower.  The lender then charges the borrower a slightly higher interest rate.  This option is not available on all loans, but has several advantages to those who qualify.  You do not have to pay a monthly premium, enjoy tax benefits, and have the potential to qualify for a bigger loan.

• Monthly Mortgage Insurance—Also called “MI” or “MMI,” this option allows the borrower to pay a fee every month, regardless of the down payment amount.  Borrowers will be locked into paying MI’s for at least five years.  However, the mortgage payments decrease by the premium amount once borrowers are in the position to cancel their MI’s.  Some insurance companies are now making MI’s 100% tax-deductible for homebuyers with adjusted gross incomes of as much as $100,000.

. . . to be continued.

This is the first time that homeowners with low down payment loans will be able to deduct the cost of their mortgage insurance premiums, resulting in an average annual tax savings ranging between $300 and $350 for taxpayers taking the deduction.

Under the new law, passed by Congress and signed by President Bush late last year, private mortgage insurance (PrivateMI) premiums are fully tax deductible for borrowers who buy or refinance a home this year if their adjusted gross income is $100,000 or less. Families with incomes of more than $100,000 and up to $109,000 will be eligible for a reduced deduction.

Since the new deduction is effective for the 2007 tax year, tax day in April 2008 could bring a bigger refund to qualified borrowers who buy or refinance homes this year with tax-deductible private mortgage insurance.

A broad coalition of tax, consumer, civil rights and civic groups strongly supported the mortgage insurance deduction.

“Making mortgage insurance tax deductible will amount to real savings for people who need it the most — families who’ve worked hard to get into their first homes,” said Pete Sepp of the National Taxpayers Union. “Our tax code has long recognized the importance of allowing costs associated with home financing to be tax deductible, and mortgage insurance premiums should be no exception. Congress should uphold this principle by extending the federal tax deduction for mortgage insurance.”

“Tax deductible mortgage insurance results in hundreds of dollars in savings for low to middle-income families. This important step towards homeownership was long overdue, and it is time for families to take advantage of the new deduction,” said Bruce Hahn, president of the American Homeowners Grassroots Alliance (AHGA). “Making the deduction permanent would help lower income and first time home buyers, promote stability in the housing market, maintain home values and limit the impact of the current mortgage turmoil.”

“Like many Americans, Latinos rely on homeownership to build wealth and are entering the housing market to get a piece of their American Dream,” said Brent Wilkes, Executive Director of the League of United Latin American Citizens (LULAC). “This is a well-deserved tax deduction designed to help those who need it most — families who are buying a home without a big down payment.”

“Homeownership fosters strong communities,” said Melanie Campbell, Executive Director/CEO of the National Coalition on Black Civic Participation. “This new tax deduction can help low and moderate income families move one step closer to realizing their dream of owning a home.”

This new law comes at a time when real estate market conditions are changing and increasing warnings of exotic loan risks are being voiced by government regulators.

Mortgage insurance plays a crucial role in maintaining the stability and health of the mortgage finance system. With rising interest rates and slower appreciation of home prices, many people who used exotic loan structures are being surprised with higher monthly payments.

“A loan with private mortgage insurance is a smart choice for many home buyers in today’s market, especially low- and moderate-income families,” said Steve Smith, Chief Executive Officer of The PMI Group, Inc. and President of Mortgage Insurance Companies of America (MICA). “PrivateMI has always been an easy and predictable way for buyers to finance their home purchase, and it can be canceled when it’s no longer needed. Now, this new tax deduction makes it an even better choice.”

Compared to other financing options, a mortgage loan with PrivateMI is often more affordable. Its fixed, predictable and cancelable premiums provide consumers with peace of mind — and now a tax deduction.

Private mortgage insurance premium prices vary based on the size of the down payment, type of mortgage and amount of insurance coverage. The cost of PrivateMI for a median-priced home — the projected national median price in 2007 for a single family home is $224,500 — ranges from $50 to $100 per month.

“This new tax deduction will make loans with private mortgage insurance even more attractive for home buyers who are on the cusp of homeownership,” said Suzanne Hutchinson, MICA Executive Vice President. “The wide-ranging group of organizations that support this important tax break will certainly be working to extend the deduction beyond 2007.”

Found here.