Spring is here, and after reading our latest blog about the hottest real estate markets in 2016, you might be pumped on the idea of buying a home! If you don’t have 20% to put down on your dream home, you may start to hear about a little something called mortgage insurance, also known as, PMI (private mortgage insurance) or MIP (mortgage insurance premium). So what the heck is it? Read on to learn more about mortgage insurance and how it works with the different loan products that we offer.
What is Mortgage Insurance?
Mortgage insurance is an insurance policy taken out by the homeowner that protects the lender against loss should the homeowner default on their mortgage payments. Different loan programs have different types of mortgage insurance, but all types of mortgage insurance function to lower the risk lenders may experience when loaning money. For many, the option to purchase mortgage insurance may help you to qualify for a loan you might not otherwise be able to obtain.
How does it work?
Mortgage insurance is usually paid by you, the homebuyer, and may be paid in three ways:
- Monthly “as you go” payments as part of your regular mortgage payments
- Upfront lump sum paid at closing
- A combination of an upfront premium and monthly payments
Mortgage insurance may sometimes be paid by the lender, usually in exchange for a larger loan amount or higher interest rate. This is called LPMI or lender paid mortgage insurance.
If you’re getting a conventional home loan and are putting less than 20% towards a down payment, mortgage insurance will likely be required, and can be obtained through a private mortgage insurance company. This is called Private Mortgage Insurance, or PMI. PMI is calculated as a percentage of your loan amount, so the larger your loan, the more expensive your PMI.
Don’t like PMI? Don’t worry, you may be able to make it go away eventually. Once you’ve paid off 20% of your loan, talk to your lender and private mortgage insurance company about your options to get rid of the PMI. You may be able to cancel PMI sooner by making extra payments on the loan balance, or if your home equity grows to 20% due to home value appreciation.
Unlike conventional loans, all FHA loans must have mortgage insurance, no matter how much you have for a down payment. Insurance is purchased from the Federal Housing Administration (FHA) rather than a private company.
FHA mortgage insurance has both an upfront premium and monthly mortgage insurance payments. As of today, the upfront mortgage insurance premium on an FHA home loan is 1.75% of the base loan amount. The monthly mortgage insurance rates depend on the length of the loan, loan amount and loan-to-value or LTV, find more details here.
Similar to FHA, all USDA loans require mortgage insurance purchased from the US Department of Agriculture (USDA). USDA mortgage insurance is paid for the entire life of the loan.
USDA mortgage insurance consists of both an upfront premium and monthly payments. You will likely have the option to roll the upfront premium into the loan, however it will increase both your loan amount and overall costs. The monthly insurance rate is calculated annually based on your remaining principal, so the cost of the monthly payment decreases over the loan term.
For veterans getting a VA loan, there is no mortgage insurance. The VA Guarantee replaces mortgage insurance and functions similarly. While there is no monthly mortgage insurance premium to pay, there is an upfront “funding fee,” which may vary based on:
- Type of military service
- Down payment amount
- Disability status
- Whether you are buying or refinancing
- Whether this is your first VA loan or not
Ready to find out which type of loan and mortgage insurance is best for you? Give us a call at 877-706-5856!