Mortgage Insurance Explained

Some first-time homebuyers may find themselves looking at their closing disclosure and notice a charge for mortgage insurance to be collected every month. So, what is mortgage insurance? We’re here to demystify what it is and offer guidance on how to get it removed! Stay tuned.
Mortgage insurance allows you to buy a house with a down payment of less than 20% and still qualify for a home loan. You cover the cost of this insurance, which covers a portion of the principal for the lender if you stop making mortgage payments. However, you remain responsible for the loan, and you could lose your home to foreclosure if you fall too far behind. The cost and specifics of mortgage insurance depend on the loan type. You’ll typically need to pay for it if you get an FHA mortgage or if your down payment on a conventional loan is less than 20%.

PMI VS MIP 
Private Mortgage Insurance (PMI) for Conventional Loans
Conventional loans often come with low down payment options, sometimes as low as 3%. However, if your down payment is under 20%, you will typically need to pay for private mortgage insurance (PMI).
– Estimating Costs: A PMI calculator is helpful in determining the cost, which depends on factors like your loan size, credit score, and other variables.
– Payment Structure: The monthly PMI premium is usually included in your overall mortgage payment.
– Cancellation: Once you build over 20% equity in your home, you can request to cancel PMI.

Mortgage Insurance Premium (MIP) for FHA Loans
FHA loans offer low down payments, starting at 3.5%, and have more lenient credit requirements compared to conventional loans. However, FHA loans require both an upfront mortgage insurance premium (MIP) and an annual premium, regardless of the down payment size.
– Upfront Premium: The upfront MIP is 1.75% of the loan amount, payable at closing. It can be paid in cash or added to the loan amount.
– Annual Premium:

• For loans with a down payment of less than 10%, the annual MIP is paid monthly for the life of the loan.

• For loans with a down payment of 10% or more, the annual MIP is paid for 11 years.

• The annual MIP ranges from 0.15% to 0.75% of the loan balance, based on your down payment, loan amount, and loan term. Most borrowers pay around 0.55%, as per FHA guidelines.

How and When to Cancel Mortgage Insurance
If you’re looking to eliminate private mortgage insurance (PMI), there are several options available. You can wait for PMI to be automatically canceled when your mortgage balance drops to 78% of your home’s value, or you can request early cancellation once your mortgage balance reaches 80% of the original home value. This involves sending a written request to your mortgage servicer. Alternatively, you could consider getting a reappraisal to prove your home’s increased value, which could allow for early cancellation of PMI if your loan is backed by Fannie Mae or Freddie Mac. Another option is to refinance your mortgage, potentially securing a lower interest rate while eliminating PMI if the new loan balance is below 80% of the home’s value. Keep in mind that rules differ for government-backed loans, like FHA loans.

How To Avoid Mortgage Insurance
We love this article from The Mortgage Reports on 10 ways to avoid mortgage insurance. Look at their tips below or click the link to read more.

1. Lender-Paid Mortgage Insurance (LPMI)

– The lender pays your mortgage insurance.
– In return, you pay a higher interest rate.
– Available with as little as 3% down.

2. Use a Piggyback Loan

– Structure: 80% first mortgage, 10% second mortgage, and 10% down payment.
– Avoids PMI with less than 20% down.

3. Consider No-PMI Home Loans

– Some lenders offer low down payment loans with no PMI.
– Examples: NACA, Bank of America, CitiMortgage, Movement Mortgage, and Caliber Home Loans.

4. State or Local Homebuyer Assistance Programs

– Programs offer grants, tax credits, and down payment assistance.
– Help achieve a 20% down payment to avoid PMI.

5. Use Gift Funds

– Gift money from family can help you reach a 20% down payment.
– You must provide a gift letter to the lender.

6. Purchase a Less Expensive Home

– Easier to make a 20% down payment on a lower-priced home.
– Reduces the required down payment amount.

7. Check VA Loan Eligibility

– Available for veterans and active-duty service members.
– No PMI required and no down payment needed.

8. Buy Appreciating Real Estate

– Purchase property likely to increase in value.
– Request PMI cancellation once home value rises.

9. Consider Single-Premium PMI

– Pay the entire PMI premium at closing.
– Avoid monthly PMI payments.

10. Look at Split-Premium PMI

– Pay a larger upfront fee to lower monthly payments.
– Useful if your debt-to-income ratio is high.

We hope this guide to mortgage insurance has been helpful to those of you who are looking at FHA or conventional mortgages. While other types of mortgage insurance do exist, we decided to cover these two types since they are the most common. If you have any more questions about mortgage insurance that we did not cover, please contact our staff or your loan officer with your questions. We are always happy to help!