private mortgage insurance

Private Mortgage Insurance

What is Private Mortgage Insurance and why do I have to pay it?


Private Mortgage Insurance (PMI) is designed to reimburse a mortgage lender in the event of default on a mortgage loan when the borrowers are making a down payment of less than 20 percent of the purchase price of a home. PMI has nothing to do with job loss, death or disability and it will not pay your mortgage payment or loan balance if one of these things happens to you.


Mortgage Insurance lowers the risk to the lender of your home loan so that you can qualify for a loan that you might not otherwise be approved for. Some loans like FHA and USDA loans may also require you to have mortgage insurance.


If you are required to pay for mortgage insurance on your home loan, it will be included in your total monthly payment, your out of pocket cost at closing or both.



How can I avoid paying Mortgage Insurance (PMI)?


Mortgage Insurance is unavoidable on government insured loans except for VA loans. There are ways to avoid having to pay for this insurance with some types of mortgage loans. Typically, PMI will be required if you make less than 20% of the purchase value of a home for a down payment. PMI also applies to getting a refinance loan if your equity in your home is less than 20% or more. Use the following as a guideline for types of loans and certain requirements for private mortgage insurance.



Types of Mortgage Insurance


If you have a low-down payment there are several different types of loans available to you and depending on the type of loan you get you will pay for mortgage insurance in different ways if at all.


For FHA loans borrowers will have what is called Mortgage Insurance Premiums (MIP). Typically, 1.75 percent of your loan is required to be paid as an upfront fee and is added to your loan amount at closing. If you don´t have enough cash on hand to pay the upfront fee, you are allowed to roll the fee into your mortgage instead of paying it out of pocket. If you do this, your loan amount and the overall cost of your loan will increase. Then there is an annual MIP fee of .85 percent of the loan amount is paid monthly for the life of your loan. It is important to know that even if you reach 20% equity in your home you will continue paying the MIP unless you decide to refinance to a conventional loan to remove the monthly Mortgage Insurance.


You can avoid Mortgage Insurance on Conventional loans by having 20% equity or making the 20% down payment on the purchase, otherwise the insurance for the lender is called Private Mortgage Insurance (PMI). The PMI rate varies based on a few factors, one is your credit score and your loan to value calculation. Loan to value is the amount of the loan to the current home value. (loan amount / home value).


There are Low Down Payment Conventional Loans without having to pay PMI. Not all Conventional loans require PMI if you have less than 20% down payment or equity in refinance. These loans typically require you to pay a higher interest rate, depending on your credit score combined with the amount you put as a down payment.



Lender Paid Mortgage Insurance (LPMI)


When lenders pay the cost upfront through LPMI you will pay a slightly higher interest rate to cover the cost of not paying for mortgage insurance. So often your monthly mortgage payment is less without the added fee. This also allows you to make a lower down payment, so your upfront cost could be considerably less. Since you will be paying a slightly higher interest rate over the life of the loan you very well could be paying more but not upfront.



Consider a VA Loan


If you are a qualified veteran a VA backed Loan may be right for you.


The Department of Veterans Affairs (VA) guarantee replaces the mortgage insurance due to the government agency is guaranteeing the loan itself. This loan is designed to help active service members, veterans and their families. Since there are no monthly mortgage insurance premium you will still pay an upfront funding fee. The fee amount varies based on the type of military service, down payment amount (could be zero down payment), your disability status, first time using your benefit and if you´re buying a home or refinancing.


With a VA Loan the benefits include a zero down payment option and a VA loan doesn’t require PMI due to the government agency is guaranteeing the loan itself.