What is mortgage insurance?
Mortgage insurance is required for most home loans that don’t have at least a 20% down payment. It’s bought and paid for by the homeowner, but it offers them no coverage. In a nutshell, it’s there to protect the investor (who buys the loan on a secondary market) if the loan goes into default. There are a couple of different types of mortgage insurance depending on your loan.
Conventional Loans: Private Mortgage Insurance (PMI)
As part of the loan guidelines set out by Freddie Mac, Fannie Mae and most investors in conventional loans, a borrower is required to pay PMI when at least 20% of a home’s purchase price is not provided as a down payment.
Investors view the down payment as additional evidence that you are financially prepared to take on the debt of a monthly mortgage payment. The larger the down payment, the more you can prove to the investor that you will not be at risk of joining the default statistics.
When obtaining a mortgage, it’s important that you find a loan that fits your specific situation and goals. Quicken Loans offers the PMI Advantage program, in which borrowers can choose a slightly higher interest rate to take advantage of lender-paid PMI. Learn more about PMI Advantage.
FHA Loans: Mortgage Insurance Premium (MIP)
While conventional loans have more strict underwriting guidelines, FHA-insured loans require a small amount of cash to close a loan. As a result, all borrowers must pay MIP to insure the investor against loss if the homeowner defaults on the mortgage. While there are ways to avoid PMI with conventional loans, there is no way to avoid MIP on FHA loans because the minimum down payment is only 3.5%.
Whether MIP can ever come off your FHA loan depends on a few factors, including when it was originated, the amount of your down payment, and the current loan-to-value (LTV) ratio.
For originations on or after June 3, 2013, FHA requires MIP to be paid for 11 years if your original LTV is 90% or lower, and for the life of the loan if it’s over 90%. For more details, visit this post.
MIP amounts were also decreased for all originations on or after January 26, 2015. For more information on the cuts, check out this post.
For loans originated as of October 4, 2010, if your FHA term is more than 15 years, your monthly mortgage insurance payments will be canceled when the LTV reaches 78%. This is calculated based on the original value of your FHA home loan and only if you paid the annual MIP amounts for at least five years. If the term of your FHA loan is 15 years or less, with an LTV of 90% or greater, the monthly mortgage insurance payments will stop when the LTV reaches 78%. Mortgages with an LTV of 89.99% or less will not be charged annual mortgage insurance premiums. If your loan was originated on or after April 18, 2011, FHA made a change to their MIP factors which impacted the 15-year loan. Now, there is MIP on LTVs greater than 78%. LTVs less than or equal to 78% do not require MIP, however not all lenders have followed suit with the 0% MIP on LTVs less than 78%.
For investors, it’s true that insurance replaces the unknown with security. For home buyers and homeowners, the best strategy is to obtain a mortgage that meets your needs, your pocketbook, and your financial goals.