Pathway Mortgage | Mortgage Education and News

If you are in the market for a new home, you have probably heard that your monthly mortgage payment will include something called “mortgage insurance.” But, if you’re like most people, you’re also wondering, what is mortgage insurance and who is it insuring? Let’s break it down.

I.  What is mortgage insurance?

Mortgage insurance is what it sounds like – insurance on your mortgage. But, it doesn’t insure you. Instead, it is insurance for the lender, reducing their risk on the money they lend. Mortgage insurance is the reason that lenders are able to loan large amounts of money with small down payments. It gives your lender a guarantee that they will recover some money if you default on your mortgage payments.  

The only way to avoid mortgage insurance is to make a down payment of 20% or more of the value of the home when you purchase it. A conventional loan with 80% or less loan to value ratio does not require mortgage insurance.

The amount of your mortgage insurance depends on 1) the type of loan you have, and 2) the amount of your loan. Let’s look at the different types below.   

II.  Types of mortgage insurance

• Private Mortgage Insurance

Private Mortgage Insurance (PMI) is mortgage insurance on a private (non-government) loan. This is what is usually going to be referred to as a conventional loan. The rates for private mortgage insurance will vary, but .62% is somewhat of a standard number. This is an annual rate, meaning you will pay .62% of your loan amount each year in mortgage insurance. So, for a $200,000 loan, your annual PMI might be approximately $1,240, or $103 per month.

• FHA Mortgage Insurance Premium (MIP)

All FHA loans require mortgage insurance. If you have an FHA loan with less than a 10% down payment, you will pay mortgage insurance for the life of that loan. If your down payment is more than 10%, your mortgage insurance will go away after 11 years of payments.

MIP has two types of insurance. The first is upfront mortgage insurance premium, and the second is annual mortgage insurance. The upfront premium is collected at closing, and is typically 1.75% of your loan amount. This can be financed into your loan, so that you do not pay it out of pocket. The annual MIP premium is typically .85% of your loan amount.

• USDA Mortgage Insurance

The USDA Loan Program will finance 100% of your home purchase. USDA loans typically require both upfront and annual mortgage insurance. The upfront mortgage insurance is referred to as the USDA Guarantee Fee.  This is typically 1% of your mortgage amount, and the annual premium is usually .35% of your loan amount.

• Veterans Affairs (VA) Loans

VA Loans, available to eligible veterans and dependents, are the only mortgage program that have no mortgage insurance. However, the VA does charge what is called a “funding fee” when you close on your loan. This funding fee is much like the upfront mortgage insurance for FHA and USDA loans. It is typically 2.15% for a first time VA buyer (unless you make 5% or more down payment), and 3.3% for subsequent VA loans. It can also be included in your financed amount. This is one of many reasons that VA loans are very popular for eligible borrowers – no down payment is required, interest rates are typically very favorable, and there are no monthly payments for mortgage insurance. It is also noteworthy that some eligible veterans with service connected disability compensation.

III.  Can I get rid of mortgage insurance?

We talked above about a few ways to avoid mortgage insurance:  

1. Make 20% down payment on a conventional loan.
2. Down Payment of 10% or more on FHA Loan +  11 years of payments.
3. VA Loan for eligible borrowers – no mortgage insurance!

If you’re not in one of those categories, here are a couple of other ways to escape mortgage insurance payments:

• For a conventional loan, pay your mortgage down to the 80% LTV mark. Mortgage insurance cancels automatically on a conventional loan when your LTV reaches 78%. But, once you reach 80%, you can request cancelation of the mortgage insurance. Because this is based on the loan to value, not necessarily your purchase price, you might want to consider having your property appraised during the life of your loan if you think the value has increased enough to reduce your LTV below the 80% mark.

• REFINANCE. If you have a government loan in which your mortgage insurance is there to stay for the life of the loan (or at least 11 years, if your down payment was 10%), you might consider refinancing into a conventional loan when your LTV has gone to less than 80% LTV. Again, if your property value increases, you might be able to do this sooner than if you waited until your loan was 80% of your original purchase price.  

Conclusion

Mortgage insurance is another important factor in considering what goes into the costs of your mortgage. Knowledge is certainly power when it comes to buying a home and taking out a mortgage. If you are in the home buying process, be sure that you are asking questions and getting meaningful advice from your loan officer. Call us today if you have questions!

Davis Love
Pathway Mortgage
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