What is mortgage insurance?
Mortgage insurance is an insurance policy that the buyer of a home is required to pay on behalf of the lender. The policy guarantees that the lender will be paid back should the buyer default on the loan. This policy is for the lender NOT the buyer, even though the buyer pays for it.
Typically, mortgage insurance policies are required on conventional loans when the buyer puts down less than 20% of the value of the home. It is listed as PMI (private mortgage insurance) on your statement. Once the buyer builds up 20% equity in the home, the policy is no longer needed and is dropped. Buyers should keep an eye on the cash equity they have built up as well as the appreciated value of the home so that the 20% figure can be reached at a faster rate. Your lender will probably not volunteer this information to you, so you will need to have an appraisal done (or use the tax appraisal if it is high enough) once you think that your have reached the 20% equity point.
Unfortunately, on government backed loans (FHA), the mortgage insurance (known as MIP) remains on the home forever, even after you have 20% equity.
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