What is home mortgage insurance and do I need it?
The purpose of mortgage insurance is to protect the mortgage lender or property titleholder from financial loss if a borrower becomes unable to make their monthly payments.
Borrowers who make a down payment of less than 20 percent will typically be required by the lender to pay Private Mortgage Insurance (PMI) on a conventional loan (e.g., a loan that is not an FHA, VA or USDA loan).
If you are required to pay mortgage insurance, your lender will likely “roll” the amount into your monthly mortgage payment. Once 20% equity in the home is reached, PMI can often be waived. If you are a homeowner and have been paying off a mortgage for several years and have been paying mortgage insurance, you may contact your lender and ask that it be waived.
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Read on to learn more about home mortgage insurance and why mortgage insurance is important.
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How does mortgage insurance work?
Mortgage insurance payments can be paid as either a lump sum or as part of your monthly mortgage payment.
Most homebuyers choose to have the PMI payments included in their monthly mortgage payment. PMI is calculated as a percentage of your loan amount and your lender will calculate the amount of your monthly payment. This calculation will be based on the amount of your down payment and your credit score.
Early in the mortgage application process you may find that you need to
rebuild and improve your credit score to get a better, lower, interest rate.
When is mortgage insurance required?
PMI is typically required when borrowers make a down payment of less than 20% on a conventional loan.
As a homebuyer, you already have many expenses that come with owning a home, and paying mortgage insurance is an additional expense you’ll need to budget for. You may be surprised to learn that mortgage insurance actually benefits homebuyers.
The premiums lenders collect help the lender lower their financial risk when they lend to people with lower credit scores and greater risk of defaulting on the loan. This insurance allows more people to qualify for a mortgage, even if they have lower credit scores and/or have less money to use as a down payment.
Not everyone can afford to put 20% down on a home purchase. For example, on the purchase of a $500,000 home, that’s a down payment of $100,000. That’s a lot of cash and most people just don’t have that much available. Many homebuyers will be able to qualify for a mortgage using a lower down payment, as long as they pay PMI.
How much does mortgage insurance cost?
In general, the mortgage insurance cost is about 0.5 to 2% of the loan amount per year.
How much can you expect to pay? If your loan amount is $300,000 and your mortgage insurance is 1.0% annually, you’d pay $3,000 for mortgage insurance in a year, and $250 per month.
Types of mortgage insurance
There are several types of mortgage insurances, and whether your mortgage will require insurance depends on certain factors, including the amount of your down payment and the type of loan you will be getting. Here is an overview of the types of mortgage insurance:
Private mortgage insurance (PMI). Borrowers who make a down payment of less than 20 percent will typically be required by the lender to pay monthly PMI on a conventional loan.
Mortgage insurance premium (MIP). This premium is required for most Federal Housing Administration
(FHA) single-family mortgage loans. First, the borrower will pay an upfront fee that is equal to 1.75% of the loan amount. The borrower will also pay a premium that is added to the monthly mortgage payment.
Borrower-paid mortgage insurance BPMI). This is a type of PMI, which is paid monthly by the borrower as part of their mortgage payment, until they have enough equity in the property, at which point the lender may cancel or waive the PMI payments.
Lender-paid mortgage insurance (LPMI). The term “lender-paid” is a misnomer that homebuyers should be aware of. With LPMI, the borrower still pays the insurance, the only difference between this option and PMI is that with LPMI, the lender adjusts the mortgage interest rate the borrower pays to cover the mortgage insurance cost.
If you choose this form of mortgage insurance, you’ll pay it with a higher interest rate and it will be in effect for the duration of the mortgage, with no opportunity to have it waived or canceled. However, homebuyers who plan to stay in the home for a short period of time may save money using this option. The best long-term option is PMI.
Mortgage title insurance. According to Consumerfinance.gov, lender’s title insurance protects your lender against problems with the title to your property, such as someone with a legal claim against the home. Lender’s title insurance only protects the lender against problems with the title. To protect yourself, you may want to purchase owner’s title insurance.
For how long do I need mortgage insurance?
When PMI is required for conventional mortgage loans, lenders require PMI be paid until your home equity reaches 20% of your home's market value.
For MIP, which is paid on FHA loans, the insurance payments may be required for the life of the loan.
Can I choose the mortgage insurance company?
No, borrowers do not get to choose the mortgage insurance company. The lender gets to choose.How can I avoid paying mortgage insurance?
These are the most common ways to avoid paying mortgage insurance:
1. Down payment of 20% or more. With a down payment of at least 20%, lenders won’t charge PMI on your loan.
2. Second mortgage. Also known as a “piggyback loan,” getting a second mortgage could help some homebuyers avoid paying PMI. In this scenario, you would get a mortgage with 10% down, and a second mortgage (with the same lender or another lender) for an additional 10% down, thus avoiding the PMI. However, before you consider this strategy, take into consideration the total closing costs for two loans and how long you plan on keeping the home.
3. Government-insured loans. This includes FHA, VA and USDA loans.
- FHA: When you get a mortgage loan insured by FHA, you have to pay an up-front mortgage insurance premium (MIP), which can be included in the loan amount. You will also have to pay a monthly insurance premium that is added to the regular mortgage payment. FHA uses the premiums to pay the lender if you default on your mortgage.
- VA: The U.S Department of Veterans Affairs backs VA loans. The funding fee is a one-time payment that the veteran, service member, or survivor pays on a VA-backed or VA direct home loan. This fee helps to lower the cost of the loan for U.S. taxpayers since the VA home loan program doesn’t require down payments or monthly mortgage insurance. The VA funding fee may be waived for veterans who meet certain requirements.
- United States Department of Agriculture (USDA). These loans have no mortgage insurance. USDA guaranteed loans are charged an annual guarantee fee instead of mortgage insurance. Guarantee fees are paid to USDA by the lender and are usually included in the homeowner's monthly loan payment. Whether you’re ready to apply for a mortgage or still shopping around, a CU SoCal Mortgage Loan Originator can provide you with loan options and a mortgage insurance cost estimate, so you can decide which mortgage loan is right for your unique situation.
Why savvy consumers choose CU SoCal
For over 60 years CU SoCal has been providing financial services, including mortgages, Home Equity Loans, HELOCs, car loans, personal loans, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation loan consultation with a CU SoCal Member Services specialist.
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