This video reflects the perspectives of the Gaylord-Hansen Team at loanDepot. We advise discussing directly with your mortgage expert or lending professional for any advice regarding your particular situation.
Private mortgage insurance is insurance that is required when homebuyers purchase a home with less than 20% down. It essentially covers the risk to the lender for a small down payment. The borrower pays the private mortgage insurance on the lender’s behalf.
This insurance DOES NOT protect the borrower from any missed payment or default on the loan. However, it DOES allow the homebuyer to purchase a home with less than 20% down.
It also protects the lender should a borrower go into default by covering a certain amount of loss that could be incurred if the property is foreclosed upon and needs to be sold by the lender.
There are different types of PMI, and PMI is used primarily on government-insured loans, including:
VA does NOT have mortgage insurance.
PMI is calculated by using a matrix that factors in down payment, FICO scores, and risk coverage required by the lender. A smaller down payment and lower FICO score will carry the highest PMI rate. For example, a 3% down payment with a FICO between 620-640 can cost around 1.86% of the loan amount. The same 3% down payment with a FICO above 760 would be approximately .58%. This is over a 1% difference. We typically see PMI rates between .5% and 1.0%.
This rate is an added cost on a monthly basis. It is essentially an add-on to the interest rate. Mortgage insurance is automatically removed when the loan reaches 78% LTV through amortization of the loan. In other words, each month you are paying your loan down. When the loan gets to 78% LTV of the original purchase price, mortgage insurance drops off. You can also remove it through a refinance if your home has appreciated in value to a level of 80% LTV.
Another form of mortgage insurance is known as Lender-Paid Mortgage Insurance (LPMI)
LPMI can also be considered. In essence, the lender increases the “normal” market interest rate to take on the higher risk of a low down payment. There are pluses and minuses to both. Under LPMI, mortgage insurance does not “drop off,” as it is fixed into the interest rate at the beginning of the loan.
FHA calls mortgage insurance a different name: It is MIP, which stands for Mortgage Insurance Premium. FHA will charge an upfront amount to help fund the insurance program for HUD, the Housing and Urban Development. This is known as UPMIP and is currently 1.75% of the loan amount. This is added to your loan amount. FHA also has a monthly charge for MIP. The cost for this ranges from .8% to 1.05% on a 30-year fixed loan, depending on the down payment.
While mortgage insurance can add to your monthly mortgage payment, it has been tremendously successful in helping homebuyers who do not have enough money for a 20% down payment - which is a lot of money - enter the housing market and take advantage of future appreciation that will likely more than cover the cost of mortgage insurance.
According to the National Association of REALTORS® (NAR), homeowners have more than 45 times the net worth of a renter. Becoming a homeowner sooner rather than later can help build wealth for a family. Use the advantage of mortgage insurance to get into a home sooner instead of trying to save for a 20% down payment.
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