Mortgage Insurance: An Overview
Say you purchased a home with a down payment that was less than 20% of the purchase price, or maybe you found yourself in a position where you had to refinance with less than 20% equity. While these situations are quite common, they are also the situations that lead to your likely having to purchase mortgage insurance.
What Kinds of Mortgage Insurance Are There?
There are a number of different brands of mortgage insurance, however, it is important to understand that all mortgage insurance serves the same purpose. This is to protect your lender should you be unable to keep up with and default on your mortgage. Understanding mortgage insurance can get confusing though when there are so many different names out there to describe essentially the same insurance.
-FHA – MIP (mortgage insurance premium): Upfront premium often added to loan amount has two payments. 1.75% of loan amount + annual premium (paid monthly) 0.7% to 1.3%.
– VA – no mortgage insurance required.
– USDA – MI (mortgage insurance): Upfront premium of 2.75%, based on loan size, added to loan balance + .50% annual fee based on remaining principal balance.
– Conventional – PMI (private mortgage insurance): 0.20% to 1.50%
Pricing it Out
The premium that you will have to pay for your premium is determined by the lender and will depend on these two things: your credit score and your loan to value ratio. For example, someone with a credit score below 680 who puts down only 5%, will pay a higher premium than someone with a credit score of 750 who puts down 15%.
It should be noted that not all loan programs will offer the same terms. That’s why it’s smart to contact your agent when looking to find the right loan for you. A savvy agent can help you navigate the often confusing world of finance as they work with a wide range of professionals who can help.
Unlike some other kinds of insurance out there, people who have to take out mortgage insurance are given a few ways to pay. These include
Lender Paid Premium:
Some lenders will pay the mortgage insurance if you agree to pay a higher interest rate. This keeps your monthly payments lower than if you had to pay a monthly PMI premium, however, keep in mind that you will be paying this higher interest rate until you either refinance or pay off the loan.
Monthly:
This is the most common type of mortgage insurance payment. The premium will be calculated into your monthly payment. The lender will then pay the premium annually on your behalf. So for example, let’s say you’re purchasing a $200,000 home and have put down 10%. The PMI at a 1% rate would be $1,800 per year, $150 monthly.
One-Time Payment:
If you prefer to keep your monthly payments as low as you can a single payment might be the way to go. Typically, this kind of premium will range from 1% to 2% of the loan amount, so taking the same example above, you would be paying anywhere from $1,800 to $3,600 at the time of closing to cover your mortgage insurance premiums. The lender might also let you roll the premium into your loan so that it will be financed over the life of the loan rather than annually.