Friday, November 17, 2017

Mortgage Insurance Explained

There are two different types of mortgage insurance. 
    1. Mortgage Insurance Premium or MIP
          2. Private Mortgage Insurance or PMI

Mortgage insurance is required on any real estate loan that has a loan to value (LTV) above 80%. Not everyone can save up 20% for a down payment so MIP or PMI allows a buyer to put less down and pay insurance to protect the lender against default and foreclosure.

To explain the difference between MIP and PMI:
MIP is used for FHA loans that require a small down payment of 3.5%. You pay MIP in the form of an annual up-front mortgage insurance premium or (UFMIP) this can be financed into your loan and the current amount is 1.75% of the principal balance. In addition to this UFMIP is a monthly premium of .55% added to your mortgage payment each month.

Example:   250,000 Loan Amount x 1.75% = $4,375 Annual UFMIP 
                   250,000 Loan Amount x .55% = $1,375 /12 = $114.58 Monthly MI

FHA MIP is on your loan until the loan is paid in full or you refinance into a conventional loan and remove it after you have 20% equity in your home.

PMI is for conventional loans when you put less than 20% down. The rate factors are based on the individuals credit history and risk factors. Typically ranging from .35% to 1% of principal balance. Most insurance companies require a 660-fico score before they will cover your loan.
There are different ways to pay this type of PMI, you can choose to pay it all upfront at time of closing or as a monthly premium or a combination of both.

Lender’s also offer a slightly higher interest rate to cover the cost of the insurance called lender paid MI. I don’t recommend this if you plan to stay in your home for more than 5 years, because the higher rate is for the life of the loan and the best part about this type of PMI is you can request to have it removed after you have 20% equity in your home.

When you request your PMI to be removed you must do it in writing and they will require an evaluation of value to done on your home to establish your LTV and confirm you have 20% equity. You may have to pay for an appraisal to confirm value.

The Homeowners Protection Act of 1998 became effective in July 1999 and is known as the PMI Cancellation Act.  It was enacted to protect homeowners from the difficulty of cancelling PMI from their home loan. Now if you forget to request removal the lender is required to remove your PMI automatically when your LTV reaches 78%. I still recommend you keep track of your home’s value annually if you have PMI.

How you can avoid PMI and MIP is with a VA loan. Veterans who qualify can get 100% financing. With a VA loan there is a funding fee that is normally financed within the loan but no monthly mortgage insurance. 

Thank you for visiting my blog, I encourage you to leave a comment or questions. Let me know if my blog has helped you. I would love to hear your thoughts and any ideas for future posts. 
Go for it give me some ideas!

Roxy Redenbaugh
ACMC Loan Consultant
Mortgage Coach
Branch Manager
NMLS #269926
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