Home Foreclosure What is Mortgage Insurance? (Podcast)

What is Mortgage Insurance? (Podcast)


The basics of home loan insurance

Mortgage insurance may seem like something that protects you, the landlord, if you fall behind on your payments. But in reality, it’s a policy for the lender that guarantees they will recoup their losses if you stop repaying your loan.

Unfortunately, the owner pays for these policies. There are usually monthly fees for mortgage insurance and sometimes upfront fees as well.

Want to know more about how mortgage loan insurance works and how much it costs? Mortgage advisor Ivan Simental explains it all in the latest episode of The Mortgage Reports podcast.

Listen to Ivan on The Mortgage Reports podcast!

What is Mortgage Insurance?

Mortgage insurance protects your lender if you stop making payments. If your home were foreclosed, the mortgage insurance you paid for would protect your lender against financial loss.

Is mortgage insurance compulsory?

Mortgage insurance is almost always required when buying a home with less than 20% down payment. (The exception is if you qualify for a VA loan, which does not have monthly mortgage insurance.) This coverage is required for low down payment loans because it offsets the risk your lender is taking with an amount of higher loan.

In some cases, such as with FHA loans, mortgage insurance also allows lenders to offer lower interest rates.

Is mortgage insurance bad for buyers?

Mortgage insurance doesn’t just help lenders.

Although it only covers your lender’s financial investment, not yours, mortgage loan insurance also benefits the buyer. It allows you to buy a house with less money saved. And sometimes, like an FHA loan, mortgage loan insurance can help you buy a home even with a low credit score.

Although you may have heard that mortgage insurance is a waste of money, it often isn’t. Take the time to learn more about mortgage loan insurance and how it can help you before you dismiss the idea.

Types of Mortgage Insurance

There are two main types of mortgage insurance: PMI (private mortgage insurance) and MIP (premium mortgage insurance).

Here’s how the two measure up:

Private Mortgage Insurance (AMP)

Private mortgage insurance only applies to conventional loans with a down payment of less than 20%. The cost of PMI varies, however Freddie Mac Estimates it’s about $30 to $70 per month for every $100,000 borrowed.

If your loan amount is $350,000, for example, PMI will likely cost between $105 and $245 per month.

One important thing to note about the PMI is that it can be removed once your home reaches 80% loan-to-value (LTV) – meaning you have accrued a 20% equity interest in the home. This usually happens over a few years as you pay off your mortgage and the value of properties increases.

Mortgage Insurance Premium (MIP)

Mortgage insurance premiums are for FHA loans only. Although MIP rates can vary, most borrowers pay 0.85% of their loan amount per year. This is split into monthly installments and included in your mortgage payment, like with PMI.

The FHA also charges an initial MIP fee equal to 1.75% of the loan amount. You can pay it at closing if you want, but most borrowers build it into their loan balance to avoid paying upfront.

Unlike the PMI, the FHA MIP cannot be undone. Assuming you deposit less than 10%, FHA MIP stays on the loan until you finish paying it off or refinancing it.

Mortgage Insurance (IM)

Although less common than PMI or MIP, there is another type of mortgage insurance charged on USDA loans. Simply called “mortgage insurance” or “MI,” the USDA charges both an annual fee and an upfront guarantee fee. These are used to keep the USDA loan program funded, much like the FHA MIP is used by the Federal Housing Administration to keep the FHA loan program running.

Do VA loans require mortgage insurance?

The Department of Veterans Affairs does not charge mortgage insurance on VA loans. However, it has similar fees to help keep the program running.

On VA loans, this is called a finance charge and it ranges from 1.4% to 3.6% of the loan amount. Like the initial FHA mortgage insurance fee, it can be paid at closing or rolled into the loan balance. Most borrowers choose to build their VA financing fees into the mortgage.

“The federal government assesses them every year, and they can change depending on what the federal government determines is the appropriate fee for that specific year,” Simental says. “So depending on your loan closing date, that’s when your fees will be set for the rest of the loan term.”

How to Avoid Mortgage Insurance

If you don’t like the prospect of mortgage insurance, you may be wondering how to avoid it.

There are several ways to bypass mortgage insurance or, at the very least, get rid of it later. You can:

Make a bigger down payment

Conventional loans do not require PMI if you make a 20% down payment. It’s the easiest way to avoid mortgage insurance costs.

All FHA loans require a MIP, but there are ways to get out of it, at least eventually. To do this, you must pay a deposit of at least 10%. Then you can cancel the MIP after 11 years in the house.

Constitute a 20% stake

Once you have 20% equity in your home (meaning your loan balance is only 80% of your home’s value), you can apply for your PMI to be waived. To do this, you just need to call your bank or your mortgage agent, the company you send your payments to.

“The call said something like, ‘Hello bank, I now have enough equity in my property that I would like to withdraw my private mortgage insurance for’,” Simental explains. ‘The bank will then say, ‘Okay. Impressive. It looks like you have enough equity, so we are able to remove that now. ‘”

In some cases, the bank or repairer may require an appraisal to confirm the value of your home. If this is the case in your situation, you will have to pay for the assessment out of pocket.

Refinance your loan

The final option would be to refinance your FHA loan into a conventional loan. As long as you have at least 20% equity in the property, you won’t have to pay PMI on your new loan.

Consult a mortgage professional

If you’re considering applying for a mortgage, talk to a mortgage expert about your options. They can help you determine if paying for mortgage insurance will be necessary in your situation or, in some cases, suggest ways to avoid it altogether.

The information contained on The Mortgage Reports website is provided for informational purposes only and does not constitute advertising for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent company or affiliates.