If you are currently in the process of purchasing a house or looking into various mortgage packages, there is no doubt that you must be familiar with the concept of mortgage insurance. As a first-time homeowner, it can indeed be quite challenging to deal with something else that adds to the long list of factors involved in purchasing your own home.
Here at Reliance Financial, we firmly believe that informed borrowers are wise borrowers. And that is why we have prepared a complete guide on mortgage insurance.
What is Mortgage Insurance?
Mortgage insurance is a type of insurance that protects the lender in the event the borrower defaults on their loan obligations. It does not provide coverage for the borrower, but instead protects the lender.
Although mortgage insurance benefits the lender, the borrower is responsible for paying the premiums. This coverage reduces the lender’s risk when issuing loans with less than a 20% down payment. Mortgage insurance also makes homeownership more accessible by allowing borrowers to qualify for a mortgage without needing a large down payment that would otherwise be required.
Forms of Mortgage Insurance
There are different forms of mortgage insurance, and the form of mortgage insurance you will require depends on the nature of your loan:
- Private Mortgage Insurance (PMI)
Private Mortgage Insurance (PMI) is required for conventional loans when the borrower’s down payment is less than 20%. It is provided by private insurers and is automatically terminated when the loan-to-value (LTV) ratio reaches 78%, in accordance with the Homeowners Protection Act.
- FHA Mortgage Insurance Premium (MIP)
FHA loans, which are insured by the Federal Housing Administration, require two types of mortgage insurance premiums: an upfront mortgage insurance premium (UFMIP) of 1.75% of the loan amount, and an annual MIP that is typically paid monthly. Unlike PMI, FHA mortgage insurance may remain in place for the life of the loan, depending on the loan terms.
- VA Funding Fee
VA loans do not require monthly mortgage insurance. However, eligible veterans and service members must pay a one-time VA funding fee. The fee varies depending on factors such as down payment and service category, typically ranging from 1.25% to 3.3% of the total loan amount.
- USDA Guarantee Fee
USDA loans, which are designed for homebuyers in eligible rural areas, include an upfront guarantee fee of 1% of the loan amount and an annual fee of 0.35%.
How Does Mortgage Insurance Work?
If you have taken out a mortgage with less than a 20% down payment, mortgage insurance is typically required. The process is outlined below:
- Applying for a home mortgage and qualifying according to your credit score, salary, and more.
- Mortgage insurance due to your down payment being less than 20%.
- The cost of the mortgage insurance could be added to the payment or added as a lump sum to the mortgage amount in case.
- If you fail to repay the mortgage, the mortgage insurance would be paid out to the mortgage company.
- Regarding private mortgage insurance, once the home equity is 20%, you can ask for its cancellation, while 22% will automatically cancel PMI.
What Are the Costs of Mortgage Insurance?
The costs of mortgage insurance vary based on your mortgage product, credit score, total mortgage amount, and down payment. Below are typical costs for each mortgage insurance:
| Insurance Type | Annual Costs of Insurance | Other Considerations |
| PMI (Conventional) | 0.2% to 2% of the mortgage | Stopped at 78% – 80% of LTV |
| FHA MIP (Upfront) | 1.75% of the mortgage amount | Payable upfront or added to the mortgage |
| FHA MIP (Annual) | 0.15% to 0.75% of the mortgage | May last the lifetime of the mortgage |
| VA Funding Fee | 1.25% to 3.3% (upfront) | Exempt for some veterans |
| USDA Guarantee Fee | 1% (upfront) and 0.35% yearly | Lower than the FHA MIP |
When Does Mortgage Insurance Get Required?
The insurance requirement of the loan depends on the type of loan and the lender. Generally speaking:
- Conventional mortgages have a requirement of PMI when the down payment is below 20%.
- FHAs have an MIP requirement regardless of the down payment amount.
- The VA mortgages eliminate mortgage insurance in exchange for a one-time funding fee.
- The USDA mortgages substitute the insurance fees with guarantee fees.
How to Remove or Avoid Mortgage Insurance?
Although mortgage insurance allows you to buy a home with a smaller down payment, you probably don’t wish to keep it around much longer than necessary. Take your pick:
Build Equity via Payments
On a conventional mortgage, when you have reached 20% equity (or 80% LTV), you can ask to have it canceled in writing. Once you have 22% equity, the mortgage insurance is canceled automatically.
Refinance Your Mortgage
If your property has increased in value substantially, refinancing will allow you to reduce your LTV and get rid of mortgage insurance. At Reliance Financial, we provide competitive refinancing services.
Home Appraisal
If the value of your home increases, a new appraisal may show that your loan-to-value (LTV) ratio is below 80%. This can make you eligible to request early removal of private mortgage insurance (PMI).
Make a Down Payment of 20%
This method is easy; by making a down payment of at least 20%, you can avoid having mortgage insurance. If you can do this, you will not be required to pay mortgage insurance.
Mortgage Insurance Benefits to Buyers
Although it seems like one more expense, there are many advantages of mortgage insurance for borrowers:
- It helps you become a homeowner by putting down just 3-3.5% of the price of the home.
- It lets you buy your dream home right away without waiting for years to save money for the 20% down payment.
- It keeps more money for you in case of an emergency or investments.
- Increases the number of mortgage programs you can qualify for.
What Reliance Financial Can Do For You?
As a lender at Reliance Financial, we understand that each person’s circumstances are different. That is why our experienced loan officers will work with you to:
- Find the loan program that allows you to save on mortgage insurance payments.
- List all the costs involved, including the cost per month for PMI/MIP.
- Talk about refinancing as an option once you’ve gained enough equity in your home.
- Guide you throughout the entire process of applying for and obtaining the loan.
Reliance Financial offers competitive rates on both conventional, FHA, VA, USDA, and jumbo mortgages. If you are a first-time buyer or want to refinance your existing mortgage, we have the necessary expertise and technology to make the right choice for you.
Conclusion
Mortgage insurance may seem like an added cost at first, but it is an important tool that helps many people achieve homeownership when they are unable to make a 20% down payment. It is important to understand which type applies to your loan, whether it is Private Mortgage Insurance (PMI), Mortgage Insurance Premium (MIP), or a VA funding fee. At Reliance Financial, our loan officers are here to guide you through each step of the process.
FAQs
Q1: Are mortgage and homeowners’ insurance the same?
Homeowners’ insurance covers damage to your property, while mortgage insurance protects the lender if you default. While you may have to pay for both insurances, they serve different purposes.
Q2: When do I stop paying mortgage insurance?
PMI on conventional loans cancels at 20% equity in the home. FHA MIP lasts the life of the loan if you put less than 10% down, and lasts 11 years if you put 10% or more down.
Q3: Can I avoid paying mortgage insurance with a low down payment?
You can obtain lender-paid PMI or use a piggyback loan structure (80/10/10) to help you avoid PMI. Speak with your Reliance Financial loan officer to determine the best option for you.
Q4: If I become unemployed, can I use my mortgage insurance for protection?
No. Mortgage insurance provides protection to the lender against losses due to default. You will need a separate mortgage protection or disability policy to protect against loss of income.
Q5 Do credit scores impact PMI and the APR?
Your credit score does impact PMI. Higher credit scores can lead to lower PMI on conventional loans. Generally, the best rates for mortgage insurance are offered for borrowers with FICO scores greater than 760.
You will also want to consider that PMI is one factor included in your APR. Therefore, because it is included in your APR, this would make your APR higher than what your nominal loan interest rate may be. Always be sure to compare APR vs. nominal interest rates when comparing loan offers.
