Comparing Private Mortgage Insurance vs. Mortgage Insurance Premium

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Comparing Private Mortgage Insurance vs. Mortgage Insurance Premium

Private Mortgage Insurance vs. Mortgage Insurance Premium: An Overview

You must understand the distinctions between mortgage insurance premium (MIP) and private mortgage insurance (PMI) if you want to buy a home.

Key Takeaways

  • Your lender will reduce its risk by forcing you to acquire insurance from a PMI business prior to approving the loan if you buy a property with a down payment of less than 20%.
  • If your down payment is less than 20%, an insurance policy known as mortgage insurance premium is utilized in FHA loans.
  • If your FHA loan was created after June 2013, there are various regulations.

Private Mortgage Insurance (PMI)

Investopedia / Sabrina Jiang

Private Mortgage Insurance

Private mortgage insurance is a kind of insurance used in traditional loans that protects lenders from the danger of failure and foreclosure while enabling purchasers without the ability to make a sizable down payment to get mortgage financing at reasonable rates.

Your lender will reduce its risk by forcing you to acquire insurance from a PMI business prior to approving the loan if you buy a property with a down payment of less than 20%.

Depending on the amount of the down payment and loan, PMI costs might range from 0.5% to 1% of the total loan amount.

If you have monthly PMI (borrower paid), you must pay a premium each month until your PMI reaches one of the following levels:

  • terminated (when the remaining debt on your loan reaches 78% of the home’s initial value).
  • canceledat your request because your equity in the home reaches 20% of the purchase price or appraised value (your lender will approve a PMIcancelationonly if you have adequate equity and have a good payment history) (your lender will approve a PMIcancelationonly if you have adequate equity and have a good payment history).
  • you reach the midpoint of the amortization period (a 30-year loan, for example, would reach the midpoint after 15 years) (a 30-year loan, for example, would reach the midpoint after 15 years)
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Other varieties of PMI include lender-paid PMI (LPMI), where the cost of the PMI is included into the mortgage interest rate for the duration of the loan, and single premium PMI, where the mortgage insurance premium is paid upfront in a single lump amount at closing or financed into the mortgage.

Advisor Insight

LUTCF Steve Kobrin The Fair Lawn, NJ-based company Steven H. Kobrin, LUTCF

The two situations against which the lender has to be safeguarded are foreclosure and default. I’ll add a third scenario to which they often seek insurance: the borrower’s demise.

When a partner dies, banks don’t want to go after the bereaved widows or widowers for money. They often urge you to get life insurance so that the remaining spouse may settle the debt. Although not usually required, it is recommended.

A lot of banks offer life insurance and employ salespeople to do so. Term insurance is often the kind of coverage used, and it tracks the loan’s performance. As you make payments, the face amount reduces.

This idea looks like a great one. I have been selling life insurance for 25 years, but I have never seen a declining term policy that was less costly than a level term policy.

Mortgage Insurance Premium

On the other hand, mortgage insurance premium (MIP) is an insurance plan used in FHA loans if your down payment is less than 20%. Either a “upfront” MIP (UFMIP), which is assessed by the FHA at the time of closing, or an annual MIP, which is computed annually and paid in 12 payments, are available. The loan’s term and loan-to-value (LTV) ratio affect the yearly MIP rate you pay. You’ll owe a greater percentage if the loan amount is larger than $625,500.

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If your loan term is greater than 15 years, FHA requires that you make your monthly MIP payments for a full five years before MIP can be dropped. MIP can also only be dropped if the loan balance reaches 78% of the purchase price listed on your mortgage documents, which is the original purchase price for loans with FHA case numbers assigned before June3, 2013. However, if your FHA loan was created after June 2013, additional guidelines will be in effect. You will pay MIP for 11 years if your initial LTV was 90% or below. You will be required to pay MIP throughout the duration of the loan if your LTV is higher than 90%.

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