Many homeowners pay it and many home buyers try to avoid it…mortgage insurance. You may be wondering, “What is mortgage insurance and why do I have to pay for it?” Conventional mortgages have private mortgage insurance (PMI) and FHA loans have what is termed mortgage insurance premium (MIP). Here’s more information on both and how they may affect your payments when you purchase a home or closing on a refinance.
Private Mortgage Insurance (PMI)As part of the loan qualifications set out by Fannie Mae and most investors, a borrower is required to pay PMI when at least 20 percent of a home’s purchase price is not provided as a down payment. Private mortgage insurance is paid by the borrower, but it benefits the lender. It protects the lender against loss if a borrower defaults on a loan.
PMI rates vary depending on down payment and FICO scores. You may find the annual premiums (divided by 12 to make monthly payments) on a minimum down payment conventional loan to run from 1.20% to .59% a year. Conventional loans also have a variety of ways to pay for the mortgage insurance. It can be paid in one lump sum, paid monthly only, or split in lump sum and monthly in one transaction.
Mortgage insurance will also drop off automatically at a certain point in the loan life. You may have to get a mortgage that requires paying PMI, but it’s also possible to obtain more than one loan (Home equity loan/2nd mortgage) and avoid paying PMI. When obtaining a mortgage, it’s important that you find a loan that fits your specific situation and goals.
Mortgage Insurance Premium (MIP)FHA guidelines allow for a small amount of cash down payment to close a loan. As a result, all borrowers must pay a MIP to insure the lender against loss if the homeowner defaults on the mortgage. While there are ways to avoid PMI with conventional loans, there is no way to avoid MIP on FHA loans because that is how the program is set up.
The MIP has increased in the last 3 years, on 4 occasions to a current level for 30 year mortgages of 1.75% in an upfront premium financed on top of the loan and an annual premium of 1.35% a year with the minimum required down payment. The annual premiums can vary depending on down payment and the term of the loan (30 year vs 15 year loans). MIP has also undergone a significant change in that the mortgage insurance premium will stay on for the life of the loan no matter how much equity the owner has in the property.
It is important to explore the differences between Conventional and FHA loans because the mortgage insurance has a significant impact on your monthly payments. It is important to find a knowledgeable loan officer that can explain your options to you.
If you have any questions or comments, please contact me at Ingrid.firstname.lastname@example.org or visit me at http://www.scottsdalemortgageexpert.com or http://www.cobaltmortgage.com/ingridquinn