Types of Mortgage Insurance
Summary: Depending on the type of loan, homeowners may be required to pay mortgage insurance. Borrowers pay Private Mortgage Insurance (PMI) on conventional loans. Two common types of PMI are borrower-paid mortgage insurance and lender-paid mortgage insurance. Homeowners with FHA loans pay Mortgage Insurance Premium (MIP).
Homeowners may see a variety of different insurances when purchasing a home. Each insurance protects the homeowner and lender in distinct ways.
Borrower-Paid Mortgage Insurance
If you are taking out a conventional loan, such as a fixed rate loan or an adjustable rate loan, and put less than 20% down on your home, you may be required to pay mortgage insurance. Borrower-paid mortgage insurance is one form of PMI (Private Mortgage Insurance) that is rolled onto your monthly mortgage payment.
Homeowners will contribute towards their borrower-paid mortgage insurance until they have 20-22% equity within their home. Once you have 22% equity this form of PMI is automatically removed from your mortgage payment by your mortgage lender.
Lender-Paid Mortgage Insurance
Lender-Paid mortgage insurance is another form of PMI charged on conventional loans if the borrower also puts less than 20% down on the home.
Unlike borrower-paid mortgage insurance, your mortgage lender technically pays for your mortgage insurance. But borrowers will pay it back through slightly increased interest rates, ranging between .25% to .50%, over the life of the loan. If you reach 20%-22% equity within your home, you cannot cancel your lender-paid mortgage insurance as it is built into your loan.
Mortgage Insurance Premium (MIP)
The Mortgage Insurance Premium (MIP) is for borrowers with FHA loans. It is paid monthly for the life of the loan unless you put a 10% down payment on your home. FHA loan borrowers pay two mortgage insurances. One is paid up front at closing (UFMIP) equaling 1.75% of the loan amount. If you cannot, or do not, pay this amount at closing, then it gets rolled into your loan in addition to the monthly mortgage insurance borrowers also pay. For example, you took out a home loan of $175,000. Your UFMIP at closing would be $3,062.50. The second mortgage insurance FHA borrowers pay is the monthly mortgage insurance payment.
Some homeowners refinance their FHA loans into a conventional loan to stop paying the mortgage premium. At the same time, if you refinance your FHA loan back to an FHA loan within three years, a part of your insurance premium is deducted from the payoff amount allowing you to pay a little less in the long-haul of the loan.
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