What Is PMI On Government And Conventional Loans

Gustan Cho Associates are mortgage brokers licensed in 48 states

This ARTICLE On What Is PMI On Government And Conventional Loans Was UPDATED And PUBLISHED On July 22nd, 2019

What Is PMI? One of the most common questions I often get asked by my borrowers is what is PMI?

  • There are two types of mortgage insurance
  • Mortgage insurance premium and private mortgage insurance (PMI)
  • Mortgage Insurance Premium is for FHA Loans
  • Private Mortgage Insurance is for Conventional Loans. Mortgage Insurance
  • Whether it is FHA Mortgage Insurance Premium or Conventional Private Mortgage Insurance is paid by the borrower for the benefit of the lender
  • In the event, if the borrower defaults on his or her mortgage loan and the loan defaults and goes into foreclosure, mortgage insurance will cover the lender
  • Some of the questions I get asked often about mortgage insurance is the following:
    • How much does mortgage insurance cost?
    • How can I avoid paying private mortgage insurance
    • When and how can I cancel my private mortgage insurance on my mortgage loan?

In this article, we will cover and discuss What Is PMI On Government And Conventional Loans.

What Is PMI?

PMI stands for Private Mortgage Insurance.

  • Private Mortgage Insurance has no benefit to the borrower
  • It does not insure the homeowner against anything
  • The purpose of private mortgage insurance is for insuring the conventional mortgage loan in the event if the borrower defaults on their mortgage loan and the mortgage loan go into default
  • A home buyer who has a conventional loan with less than 20% down payment, private mortgage insurance will be required
  • Private Mortgage Insurance, PMI, insures and protects the lender in the event if the mortgage loan borrower stops making mortgage payments on their conventional loan and goes into foreclosure

Who Pays For Private Mortgage Insurance?

The borrower pays the private mortgage insurance:

  • PMI is paid monthly as part of their mortgage payment
  • Homeowners can cancel private mortgage insurance after a few years of paying for private mortgage insurance if you can pay down the loan balance to a certain amount
  • And/or if your home appreciates in value
  • This is a great benefit for conventional loans
  • Homeowners have the option of canceling their private mortgage insurance if they have enough equity required by the lender where with FHA Loans, MIP is required for the life of the loan

FHA mortgage insurance premiums on 30 year fixed rate mortgage loans cannot be canceled. It needs to be paid for the life of the FHA Loan.

What Is PMI And How Much Does It Cost?

It is easy to calculate FHA annual mortgage insurance premium:

  • It is because it is set at 0.85% of the FHA loan balance no matter what the borrower’s credit scores are or whatever the loan to value is
  • However, there are moving parts in how much private mortgage insurance costs
  • It depends on the borrowers’ credit scores, the down payment on a home purchase
  • The loan to value on a refinance mortgage loan
  • The lower the borrower’s credit scores, the higher the risk the borrower is classified by the mortgage insurance company.

The higher the loan to value, the higher the risk the mortgage insurance company classifies the mortgage loan applicant so the costs will be higher.

FHA Mortgage Insurance Premium

FHA Loans have reduced their FHA annual mortgage insurance premium to 0.85% from 1.35% a few years ago:

  • FHA Loans have lower mortgage interest rates than conventional loans
  • This is because all FHA loans are insured by the government against default
  • Many times the private mortgage insurance on conventional loans are much higher than the FHA annual mortgage insurance premium for conventional borrowers with credit scores of under 680 FICO and those only putting down 3% to 5% down payment on conventional loans

Before jumping into a conventional loan program, shop and compare which loan will be better for you; FHA Loan Versus Conventional Loan.

What Is PMI And How Can I Cancel PMI?

One option you have with conventional loans that you do not have with FHA Loans is that you can cancel your Private Mortgage Insurance:

  • This can be done by either by paying down your mortgage loan balance so it comes to 78% Loan To Value or if your property appreciates in value where you have 22% equity in your home or 78% Loan To Value

What Is PMI And What Is Lender Paid Mortgage Insurance

What Is PMI And What Is Lender Paid Mortgage Insurance

Borrowers can opt not to pay private mortgage insurance separately

  • They can choose to have the lender pay private mortgage insurance through Lender Paid Mortgage Insurance, also referred to as LPMI
  • However, nothing in this world is for free
  • With lender paid mortgage insurance, the borrower does not pay private mortgage insurance
  • The private mortgage insurance is paid by the lender
  • However, it comes with a price. Lender Paid Mortgage Insurance is available for conventional borrowers where the lender pays the private mortgage insurance premium in lieu of higher mortgage rates
  • Depending on the individual borrower, this may or may not be a better alternative
  • The negatives of the lender paid mortgage insurance is that once it is set, you cannot change it when you have more than 20% equity in your home
  • With private mortgage insurance, you can cancel the private mortgage insurance once your loan to value reaches 80% loan to value

Private mortgage insurance automatically cancels when your loan to value reaches 78% loan to value.

For more information about the content of this topic or other mortgage-related topics, please contact us at Gustan Cho Associates at 800-900-8569 or text us for faster response. Or email us at gcho@gustancho.com. Gustan Cho Associates Mortgage Group is available 7 days a week, evenings, weekends, and holidays.

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