A Guide to Types of Mortgage Insurance and Their Costs

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Posted Dec 17, 2024

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A Person Handing over a Mortgage Application Form
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Mortgage insurance can be a confusing topic, but understanding the different types can help you make informed decisions about your home loan. Lenders require mortgage insurance for borrowers who put down less than 20% of the purchase price, typically referred to as private mortgage insurance (PMI).

PMI can cost anywhere from 0.3% to 1.5% of the original loan amount annually, depending on the lender and your credit score. This premium is usually paid monthly, and it can be a significant added expense.

Some mortgage insurance options are more affordable than others, however. For example, mortgage insurance premium (MIP) rates for FHA loans can be as low as 0.45% annually, making them a more cost-effective choice for some borrowers.

What Is It and How Does It Work?

Mortgage insurance is a type of protection that pays your lender a certain amount of money if you're unable to repay your mortgage loan. This reduces the financial risk for lenders, allowing them to offer mortgages with more relaxed requirements.

Credit: youtube.com, What is Mortgage Insurance? (Mortgage Insurance Types & How It Works)

You'll typically pay for mortgage insurance monthly, as part of your regular mortgage payments, if you make less than a 20% down payment on a conventional loan. This type of plan is called private mortgage insurance (PMI).

Mortgage insurance is also required for FHA loans, which are backed by the Federal Housing Administration, regardless of your down payment amount.

There are two types of FHA mortgage insurance: an upfront mortgage insurance premium (UFMIP) and an annual mortgage insurance premium (MIP). The UFMIP is charged as a lump sum and typically financed into your loan balance, while the MIP is charged yearly and divided by 12, then added to your monthly payments.

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Types of Mortgage Insurance

Private Mortgage Insurance (PMI) is typically required for conventional loans with a down payment of less than 20%. It protects the lender against losses if the borrower defaults on the loan.

PMI premiums can vary based on factors such as credit score, loan-to-value ratio, and loan term. A borrower with a lower credit score may have higher PMI premiums compared to someone with excellent credit.

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FHA mortgage insurance is required for all FHA loans and consists of an upfront premium paid at closing, as well as an annual premium paid monthly. The upfront premium can be financed into the loan amount, while the annual premium is divided into monthly installments.

The guarantee fee for Rural Development (RD) loans is similar to mortgage insurance and helps protect the lender against losses in case of default. The fee can be financed into the loan amount.

Mortgage Life Insurance pays off the balance of a borrower's mortgage if they pass away. It's usually purchased in addition to regular life insurance.

Title Insurance protects the lender and the borrower against any defects in the title of the property. This can include things like liens or unknown ownership claims. It's usually a one-time fee paid at closing.

Homeowner's Insurance protects the borrower's home and personal property against damage or loss. This can include things like fire, theft, and natural disasters. It's typically required by lenders and can be paid as part of the borrower's monthly mortgage payment.

Mortgage Payment Protection Insurance (MPPI) helps borrowers cover their mortgage payments if they become unable to pay due to unemployment, illness, or injury.

Cost and Payment Options

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You can expect to pay between 1% and 3% of your home's purchase price for PMI, which is usually included in your mortgage payment.

For conventional loans, the monthly PMI premium is around $30 to $70 per month for every $100,000 you borrow.

The upfront FHA mortgage insurance fee is 1.75% of your loan amount, which can be financed into the loan amount or paid in cash from your funds or by the home seller.

Annual FHA mortgage insurance premiums range from 0.15% to 0.75% of your loan amount, divided by 12 and added to your monthly payment.

You can pay your PMI premium in a lump sum upfront, divide it into monthly payments, or split it with the lender.

Here are the payment options for conventional loans:

OptionDescription
Pay monthlyBorrower-paid mortgage insurance (BPMI) added to your monthly payments.
Pay upfrontPay the entire premium in a lump sum at closing.
Split itPay part of the PMI premium in a lump sum and the other portion monthly.
Let the lender pay itThe lender pays mortgage insurance on your behalf, but you accept a higher mortgage rate.

For FHA loans, you can either finance the upfront portion into your loan amount or pay it in cash.

FHA Mortgage Insurance

FHA Mortgage Insurance is a type of insurance that's required for Federal Housing Administration (FHA) loans. You can either finance the upfront portion of your FHA mortgage insurance into your loan amount or pay it in cash.

Credit: youtube.com, Understanding FHA Mortgage Insurance Premium (MIP)

The upfront portion of FHA mortgage insurance can be paid in two ways: financing it into your loan amount, which is the most common way, or paying it in cash. You can get a gift for the cost or ask the seller to pay for it.

Annual FHA mortgage insurance must be paid as part of your monthly mortgage payments. This is a requirement for all FHA loans.

FHA MIP is a better fit if you have a low credit score and a small down payment, or if you have a high DTI ratio. You can also consider it if you can't qualify for a conventional loan or if you're borrowing on your own.

Here are some common scenarios where FHA MIP is a better option:

ScenarioDescription
You have a low credit score and a small down paymentFHA MIP is a better fit for you
You have a high DTI ratioFHA MIP is a better fit for you
You can't qualify for a conventional loanFHA MIP is a better fit for you
You're borrowing on your ownFHA MIP is a better fit for you

USDA loans, on the other hand, are similar to FHA loans but typically cheaper. You pay for the insurance both at closing and as part of your monthly payment, and you can roll the upfront portion of the insurance premium into your mortgage instead of paying it out of pocket.

Conventional Mortgage Insurance

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Conventional Mortgage Insurance is a type of mortgage insurance that's arranged by your lender with a private company. You'll need to pay it if you put down less than 20% as a down payment.

Private mortgage insurance (PMI) rates vary depending on your down payment amount and credit score, but they're generally cheaper than FHA rates for borrowers with good credit. Most PMI is paid monthly, with little or no initial payment required at closing.

You can cancel your PMI under certain circumstances, but you'll need to check with your lender for the specifics.

There are several ways to pay PMI on a conventional loan, including:

  • Paying it monthly through an escrow account or by rolling it into your mortgage.
  • Paying it upfront in a lump sum when you take out your loan.
  • Splitting it, with some paid upfront and the rest monthly.
  • Letting the lender pay it on your behalf, but be aware that this may mean accepting a higher mortgage rate for the life of the loan.

If you're buying a home with less than a 20% down payment, you'll need to pay PMI. However, you may be able to avoid it with a piggyback loan.

Frequently Asked Questions

What's the difference between PMI and MIP?

PMI (Private Mortgage Insurance) is required for conventional loans with less than 20% down payment, while MIP (Mortgage Insurance Premium) is required for all FHA loans. Understanding the difference between these two types of mortgage insurance can help you make informed decisions when choosing a loan.

How much is PMI on a $300,000 home?

For a $300,000 home, PMI costs 0.5% of the loan balance annually, or $1,500, which breaks down to $125 per month. This rate may vary based on your lender and individual circumstances.

Virgil Wuckert

Virgil Wuckert

Senior Writer

Virgil Wuckert is a seasoned writer with a keen eye for detail and a passion for storytelling. With a background in insurance and construction, he brings a unique perspective to his writing, tackling complex topics with clarity and precision. His articles have covered a range of categories, including insurance adjuster and roof damage assessment, where he has demonstrated his ability to break down complex concepts into accessible language.

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