Mortgage Insurance

What Is Mortgage Insurance and How Does It Work?

Gustan Cho Associates are mortgage brokers licensed in 48 states

This blog will cover and discuss the mortgage insurance lending guidelines for borrowers. Private Mortgage insurance, also known as PMI, is insurance that only benefits lenders and not borrowers: The homeowner pays it to protect the mortgage lender. Mortgage insurance, also referred to as MI, is required on all FHA and USDA loans.
Many different factors determine mortgage insurance. First, it is important to understand that each agency has different requirements for mortgage insurance. In the following paragraphs, we will detail mortgage insurance per agency.

Does Mortgage Insurance Help The Homebuyer?

Mortgage insurance is required on conventional loans if borrowers put less than 20% down payment and higher than 80% LTV. HUD also requires a hefty upfront MIP of 1.75% of the balance on FHA loans. FHA UFMIP can be rolled into the balance of the mortgage loan.

Borrowers then have a lifetime annual FHA MIP on all 30-year-fixed rate FHA loans. FHA MIP cannot be canceled unless the homeowner sells their home or refinances their current loan into a conventional loan with a loan to value of at least 80% or less.

What Is The Purpose of Insurance?

The term “insurance” is something that many Americans frown at. Insurance may seem like a rip-off until you need to utilize your coverage. Americans are bombarded with numerous different types of insurance from many different industries. We have everything from auto insurance, homeowners’ insurance, life insurance, recreational vehicle insurance, dental insurance, flood insurance, and even additional mortgage insurance.

If you watch television, you will likely see multiple insurance ads for every program you watch. The insurance industry has been around since 1752. You could protect your home from a fire two hundred seventy years ago. This insurance was not required like many insurances today. Insurance has grown to be a multibillion-dollar a year industry. 

What Is Mortgage Insurance?

With costs rising on almost everything worldwide right now, consumers are tightening their budgets more than ever.

Since home affordability is something thousands of Americans struggle with, we will inform our readers about mortgage insurance. We field many mortgage insurance questions when reviewing home purchasing costs.

How Does Mortgage Insurance Work?

This blog will detail why mortgage insurance is required and how it works. Gustan Cho Associates can access highly competitive mortgage insurance premiums for conventional mortgage lending.

We will detail which mortgage agencies require mortgage insurance and which ones do not. One thing to remember during this article is that mortgage insurance is put in place to protect the lender, not the borrower. Yes, you read that correctly, but home affordability would be even more out of reach for most Americans without mortgage insurance. 

Private Mortgage Insurance on Conventional Loans

All conventional loans with loan-to-value greater than 80% require private mortgage insurance. However, conventional loan PMI varies versus the fixed 0.85% annual FHA MIP. There is no UFMIP with conventional loans like the 1.75%.

FHA MIP. Conventional lenders also offer LPMI, which stands for lender-paid mortgage insurance. LPMI is where the homeowner is not charged PMI. Lenders pay PMI in place of a higher mortgage rate. The MI is built into the mortgage rate.

How Does Mortgage Insurance Work on Conventional Loans?

In this section, we will cover how conventional mortgage insurance works.  Conventional mortgage insurance has the most variables among mortgage insurance. The most common conventional mortgage insurance is paid monthly by a borrower.

Your monthly mortgage insurance premium will depend on a few factors: credit score, down payment, ZIP Code, and loan features. If a first-time homebuyer uses a conventional loan with a 3% down payment, their mortgage insurance will likely cost more than a borrower putting down 10%.

How Much Does Private Mortgage Insurance Cost?

In certain areas of the country, where foreclosure rates are higher, your private mortgage insurance might cost slightly more. If you use an adjustable-rate mortgage, your insurance premium will be slightly inflated compared to a fixed-rate mortgage.

The above examples are called borrower-paid mortgage insurance.

Mortgage Insurance

What Is Lender Paid Mortgage Insurance?

Conventional mortgage insurance can also be paid lump sums at the beginning of your mortgage loan. This process is called lender-paid mortgage insurance. You can pay this lump sum out of pocket as part of the transaction’s closing costs.

Depending on mortgage market conditions, you may take a slightly higher interest rate to pay your mortgage insurance premium, giving you a lower overall monthly payment in many scenarios. Paying the mortgage insurance premium upfront is an option on all conventional mortgage loans with less than a 20% down payment. Assuming you can afford to put down 20% or more on your home, you will not be required to pay mortgage insurance. 

Purpose of PMI

What is a Purpose Of PMI

The purpose of PMI is to protect lenders in the event of borrower defaults on their mortgage, and the property goes into foreclosure. The insurance company will insure up to 80% loan to value. For example, here is a case scenario. If the borrower defaults on a home loan and has put in a 5% down payment, the insurance company will pay 15%, or up to 80% loan-to-value to the lender. Mortgage insurance does not benefit the homeowner. But the homeowner needs to pay the premium to protect their lender.

Most Americans buying a home are putting down less than 20%. You must have mortgage insurance when you put down less than 20%. Mortgage insurance will cover the lender if you fall behind on your payments.

What Benefits Does Mortgage Insurance Have For Borrowers?

We often think of insurance policies protecting the consumer, but mortgage insurance is one of those insurances you will pay for, but the lender gets the coverage. Without mortgage insurance, home affordability would be even more out of reach for many Americans.

Mortgage insurance allows you to make a substantially lower down payment when qualifying for a home loan. Without mortgage insurance, all borrowers would need a 20% down payment, and we all know how hard that would be!

President Obama Signs The Tax Increase Prevention Act

The United States Congress has passed the Tax Increase Prevention Act of 2014. Barack Obama has endorsed and signed it. This is good news for current homeowners with loans requiring PMI payment.

Homeowners who are paying any form of PMI on home loans, the chances they should be able to deduct PMI from income taxes. Unfortunately, the 2014 Tax Increase Prevention Act of 2014 is only for the tax year 2014. This act does not extend to 2015 and thereafter.  Starting in 2015, homeowners will not be able to deduct their mortgage insurance on their income tax returns unless Congress and President Barack Obama extend this act.

Great Time To Refinance To Avoid Mortgage Insurance

What a great time to refinance to avoid mortgage insurance

Since homeowners cannot deduct their PMI or FHA MIP on their income taxes, they should think about refinancing their current mortgage loans to avoid mortgage insurance.  FHA-insured mortgage loan borrowers should consult with a licensed mortgage loan originator and see if they can refinance mortgage loans into conventional loans.  Borrowers with PMI should consider refinancing their conventional loan to a lower-rate conventional mortgage loan with LPMI for a slightly higher mortgage rate and no MI.  You can write off interest on a mortgage payment, but you cannot write off MI.

FHA Mortgage Insurance Premium 

FHA – FHA mortgage insurance premium, often referred to as MIP, is an additional fee charged to protect lenders in case of default on an FHA loan. An FHA loan has two types of mortgage insurance, an upfront lump sum and monthly mortgage insurance payments. As an upfront payment, you will pay 1.75% of the loan as financed mortgage insurance. This upfront mortgage insurance is charged in every FHA loan, regardless of your credit score, down payment, or loan amount. The monthly mortgage insurance premium does vary depending on the size of your loan and the amount of the down payment. Below are the mortgage insurance requirements for 30-year FHA mortgages. Unless you are in a high balance area, you will be charged .85% or 85 basis points for any FHA loan where you put down 5% or less. So, a 95% loan to value or higher will always have 85 basis points of mortgage insurance for the entire mortgage loan term. This is the most common form of FHA mortgage insurance, as most borrowers put down 3.5% (96.5% loan to value). If your down payment is between 5% and 10%, the mortgage insurance will drop to 80 basis points or .8% for the entire mortgage duration.

FHA Mortgage Insurance Premium With 10% Down Payment

With an FHA mortgage, if you put down 10% or drawer, you will be charged 80 basis points or a .8% mortgage insurance premium for the first 11 years you are on the mortgage loan. So, after your 132nd payment, you will no longer be charged the mortgage insurance. That amount will fall off your monthly payment.

FHA Mortgage Insurance Premium on High-Cost Areas

If you live in a high-balance area and your mortgage loan amount is more than $625,500, your mortgage insurance premiums will be slightly higher. For all FHA loans with a 5% down payment or less, you will be charged 105 basis points or 1.05% of the entire duration of the mortgage. If putting down between 5% and 10%, you will be charged 100 basis points or 1% for the entire loan duration. In high-balance areas where you put down 10% or more, you will be charged 100 basis points or 1% for the first 11 years of the mortgage loan.

 FHA Mortgage Insurance Premium on 15-Year Fixed-Rate Mortgages

The mortgage insurance is slightly less for FHA mortgages with a 15-year term or lower. For FHA mortgage loans with 15 years or less and a loan amount of less than $625,500, if you put down 10% or less, you will be charged 70 basis points or .7% for the entire mortgage term. If you put down more than 10%, you will be charged 45 basis points or .45% for the first 11 years of the mortgage.

Different Types of FHA Mortgage Insurance Premium on FHA Loans

There are a few different mortgage insurance rates if you are in a high-balance FHA area and have a large loan amount above $625,500. If you put down less than 10%, you will be charged 95 basis points or .95% for the entire term of the loan. If you put down between 10% and 22%, you will be charged 70 basis points or .7% for the first 11 years of the 15-year mortgage. If you put down more than 22%, you will only be charged 45 basis points or .45% for 11 years in your mortgage.

Mortgage Insurance Guidelines on VA Loans

VA mortgage insurance. As an added benefit to our brave veterans, monthly mortgage insurance is not required on a VA mortgage loan. While VA mortgage loans also have low, competitive interest rates, the absence of mortgage insurance helps save our veterans money on housing costs.

Understanding VA Funding Fee on VA Loans

Please remember that there is a funding fee for all veterans not receiving service-related disabilities from the VA. After the Bluewater Navy act, that amount is 2.3% of the loan amount for the first use and 3.6% for all uses after. Gustan Cho Associates are experts with VA financing and would love the opportunity to assist you and your family with a VA mortgage loan without lender overlays. The funding fee is completely waived for all veterans who receive any amount of service-related VA disability. 

 Mortgage Insurance Guidelines on USDA Loans

USDA mortgage insurance. Similar to a VA mortgage loan, a USDA loan is a no-down payment option available for all borrowers in certain rural areas. There will not be a mortgage insurance premium with a USDA mortgage loan. However, USDA requires a guarantee fee that works similarly to mortgage insurance. The government back agency, USDA, provides insurance to the lender that if a borrower defaults on the loan, a portion of the losses will be recouped.

Upfront Fee on USDA Loans

The USDA upfront guarantee is 1% of the loan amount. USDA allows you to roll the guarantee portion into the total loan amount. So technically, you can finance up to 101% of the purchase price. USDA also comes with a small annual fee of 35 basis points of the loan amount. For a $300,000 USDA loan, you will pay .35% or $1050 per year as an annual fee. This will be broken into 12 equal monthly payments of $87.50. While they don’t call this mortgage insurance, it works in a similar way.

Understanding How Mortgage Insurance Works on Loan Programs

Mortgage insurance is just one additional wrinkle in the homebuying process. We understand that mortgage insurance is confusing. Since many different mortgage programs are available, we strongly encourage you to contact our team for up-to-date guidance when purchasing or refinancing a home.

Best Mortgage Lenders For Bad Credit With No Overlays

We understand these terms may be confusing so please reach out to Mike Gracz at 630-659-7644 for more information on FHA mortgage insurance premiums. You can also direct any mortgage insurance questions to nice thing with FHA mortgage insurance is that the amount you pay is the same for every borrower and is based on the loan amount, loan to value, and mortgage term. There are no other criteria to calculate monthly mortgage insurance.

Our team of loan officers and operations staff is experts in all mortgage programs. We offer a no overlay platform on all Conventional, FHA, VA, and USDA mortgage loans. We also have access to many specialty mortgage programs, including NON-QM, interest-only loans, programs for medical professionals, no documentation loans, and even fix and flip lines of credit. We are licensed in 48 states and are available seven days a week to help you and your family with your mortgage needs. For any direct mortgage questions, please reach out to Mike Gracz at 630-659-7644. 

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