When buying a home, there are many challenges that arise during the process. One challenge that some first-time home buyers are not aware of is Mortgage Insurance. Mortgage insurance will protect the lender against defaults on home loans. The target down payment is 20%, which may be out of reach for many buyers. With Mortgage insurance, you can make a smaller down payment and still qualify for a home loan. Let’s take a look at some of the different types of mortgage insurance.
Borrower Paid Mortgage Insurance -The most common type of Mortgage Insurance is borrower-paid mortgage insurance (BPMI). BPMI comes in the form of an additional monthly fee that you pay alongside your mortgage payment. After your loan closes, you pay BPMI every month until you have 22% equity in your home (based on the original purchase price). You can roll these payments into your mortgage or pay separately each month. At that point, the lender must automatically cancel BPMI, if you’re up to date on your mortgage payments.
You may contact the lender once you have gained 20% equity in your home and ask to cancel PMI, but the lender isn’t guaranteed to approve this request. Even if your request is denied, the lender is legally required to cancel BPMI once you’ve obtained 22% equity in your home. For your lender to cancel BPMI, your mortgage payments must be up to date. You must also have a satisfactory payment history, and there must not be any additional liens on your property. In some cases, you may need a current appraisal to substantiate your home’s value.
You also may be able to get rid of BPMI early by refinancing. The downside with refinancing is that you will have to pay closing costs all over again. Therefore, it would be best to check whether a refinance would save you more money or if it is best to continue paying your BPMI until you gain more equity on your home.
The other two types of PMI aren’t nearly as common as borrower-paid mortgage insurance. Although you might still want to know how they work. There is a chance that one option sounds more appealing, or your lender may present you with more than one mortgage insurance option.
Lender Paid Mortgage insurance – Lender Paid Mortgage Insurance (LPMI) is a form of insurance that the lender pays for you. LPMI builds the cost of covering your insurance into the mortgage rate, meaning you’ll pay a higher interest rate instead of a higher monthly mortgage payment. The borrower will save on monthly payments and have a lower down payment because you are not required to have the initial 20% down payment with LPMI.
Unlike BPMI, you can’t cancel LPMI when your equity reaches 78% because it is built into the loan. Refinancing will be the only way to lower your monthly payment. Your interest rate will not decrease once you have 20% or 22% equity. LPMI is not refundable.
If your lender offers LPMI, calculate the difference between the monthly payment with borrower-paid PMI and LPMI to see which one is lower. Also, it is important to consider the downside of your interest rate on an LPMI mortgage. The rate will remain higher long after your PMI premium would have dropped off.
FHA Mortgage Insurance Premium – Mortgage insurance works differently with FHA loans. For most borrowers, it will end up being more expensive than BPMI. FHA loans feature minimum down payments as low as 3.5% and have easier credit qualifications than conventional loans. Most FHA home loans require an upfront mortgage insurance premium and an annual premium, regardless of the down payment amount. The upfront premium is 1.75% of the loan amount, and the annual premium ranges from 0.45% to 1.05% of the average outstanding balance of the loan for that year. One big advantage with FHA mortgage insurance is that once your premium is set, the number won’t fluctuate according to your credit score.
While the law has changed more than once on this issue, current guidance states that borrowers who put down less than 10 percent on an FHA loan must pay for FHA mortgage insurance until the entire loan term is over. If you put down at least 10%, however, you can have FHA MIP removed after 11 years of payments.
Want more information on Mortgage Insurance, talk to a mortgage expert today!