Mortgage Insurance: What, When, and Why
Mortgage insurance is required for mortgage loans of more than 80 percent of a home’s appraised value. This is a very good reason to save for a 20 percent down payment as the cost is prorated monthly and added to your monthly mortgage payments. Investopedia explains that mortgage insurance protects lenders by guaranteeing reimbursement of all or part of losses incurred when a mortgage defaults and is either sold through a short sale or foreclosed. The availability of this coverage is important to first-time and moderate income home buyers that can’t provide a down payment of 20 percent or more.
Who Provides Mortgage Insurance and When Do I Pay For It?
Mortgage insurance for conventional (non-government) mortgages is provided by corporations and is called private mortgage insurance or PMI. If you finance your home with an FHA loan, the mortgage insurance is called mutual mortgage insurance or MMI as borrowers of FHA loans are required to pay into the FHA’s fund used for reimbursing lenders when FHA mortgages fail. The FHA is a government agency. Borrower payments into the MMI fund help to keep FHA loan programs self-sustaining. VA loans do not require mortgage insurance, but eligible borrowers are required to pay a one-time loan guarantee fee that offsets the costs of delinquent and foreclosed VA backed home loans. FHA MMI premiums are paid in two ways. You’ll pay an upfront premium your FHA home loan or refinance closes and annual MMI premiums are prorated and added to your mortgage payments. FHA annual premiums vary according to loan-to-value ratio; the higher your LTV ratio, the higher your MMI premiums will be. This corresponds to higher default risks associated with high LTV ratios.
Lender Paid PMI: What You Need to Know
Mortgage lenders may offer borrowers the option to finance payment of PMI premiums. This option may be called lender paid mortgage insurance, but you’ll actually pay for the PMI with a higher mortgage rate. This option can be helpful to first-time or moderate income buyers who don’t want to pay PMI premiums added to their monthly payments. When deciding whether to pay PMI premiums as part of your monthly payments, or to pay a higher mortgage rate and have your lender pay for PMI, it’s important to consider that the lender paid PMI option requires you to pay a higher mortgage rate for the life of the loan while PMI premiums can typically be cancelled once the loan-to-value ratio or LTV ratio for your home reaches 78 percent.
FHA or PMI? Mortgage Shopping Can Reduce Costs
If you’re going to need mortgage insurance, it’s a good idea to compare quotes for mortgages that carry private mortgage insurance, and next to compare FHA mortgage quotes. The third step is to compare the top conventional loans with PMI to the best FHA loans to see how much and where you can save the most. Our network of mortgage lenders can provide free quotes for conventional and FHA home loans and refinancing. When comparing quotes, make note of PMI costs and FHA premiums and contact lenders for clarification if needed. Careful mortgage shopping is worthwhile now as it can produce savings that may last over the life of your mortgage.