Understanding the Two Most Common Types of Mortgage Insurance
When buying a home, especially if you’re putting down a smaller down payment, mortgage insurance can be an important part of your loan. It helps protect lenders and can sometimes make it easier for buyers to get a mortgage. There are two main types of mortgage insurance that you might encounter: Private Mortgage Insurance (PMI) and Federal Housing Administration (FHA) Mortgage Insurance.
Understanding PMI and FHA
1. Private Mortgage Insurance (PMI)
What is PMI?
Private Mortgage Insurance (PMI) is a type of insurance that lenders require when a borrower puts down less than 20% of the home’s purchase price. PMI protects the lender in case the borrower defaults on the loan.
Key Points:
- Purpose: Protects the lender against loss if you fail to repay the loan.
- Cost: Typically ranges from 0.3% to 1.5% of the original loan amount annually, and is usually added to your monthly mortgage payment.
- Removal: You can request PMI removal once your loan balance drops to 80% of the home’s original value, and it is automatically canceled when it reaches 78%.
2. FHA (Federal Housing Administration) Mortgage Insurance
What is FHA Mortgage Insurance?
FHA mortgage insurance is associated with loans insured by the Federal Housing Administration (FHA). It helps borrowers with lower credit scores or smaller down payments qualify for a mortgage.
Key Points:
- Purpose: Provides a safety net for lenders, allowing them to offer loans to higher-risk borrowers.
- Cost: Includes two parts:
- Upfront Mortgage Insurance Premium (UFMIP): A one-time payment made at closing, usually 1.75% of the loan amount.
- Annual Mortgage Insurance Premium (MIP): An ongoing monthly fee that varies based on the loan size and term.
- Duration: MIP is generally required for the life of the loan if your down payment is less than 10%. If your down payment is 10% or more, you pay MIP for 11 years.
Both PMI and FHA mortgage insurance make it easier for people to get a mortgage with a lower down payment or less-than-perfect credit, but they serve different purposes and have different costs and rules.
1. Private Mortgage Insurance (PMI)
What is PMI?
Private Mortgage Insurance, or PMI, is usually required by lenders when a borrower puts down less than 20% of the home’s purchase price. It protects the lender in case the borrower defaults on the loan.
How Does PMI Work?
PMI is typically added to your monthly mortgage payment, though sometimes it can be paid as a one-time upfront premium. The cost varies based on your loan size and down payment, but it generally ranges from 0.3% to 1.5% of the original loan amount annually.
When Can You Remove PMI?
Once you’ve paid down your loan balance to 80% or less of the home’s original value, you can request to have PMI removed. Additionally, after reaching 78% of the loan-to-value ratio, the lender is required to automatically cancel PMI.
2. FHA Mortgage Insurance
What is FHA Mortgage Insurance?
FHA Mortgage Insurance is required for loans backed by the Federal Housing Administration (FHA). It helps borrowers with lower credit scores or smaller down payments get approved for a loan.
How Does FHA Insurance Work?
FHA insurance involves two parts:
- Upfront Mortgage Insurance Premium (UFMIP): This is a one-time payment made at the time of closing, usually 1.75% of the loan amount.
- Annual Mortgage Insurance Premium (MIP): This is an ongoing fee, divided into monthly payments and added to your mortgage payment. The cost varies based on the size of your loan and the length of the term.
How Long Do You Pay FHA Insurance?
For most FHA loans, you will have to pay the MIP for the life of the loan if you put down less than 10%. If you put down 10% or more, you will typically pay MIP for 11 years.
Conclusion
Both PMI and FHA mortgage insurance serve to make home loans more accessible by protecting lenders. PMI is often used with conventional loans and can be removed once you’ve built enough equity in your home. FHA mortgage insurance is tied to FHA loans and involves both an upfront and annual fee. Understanding these types of insurance can help you make informed decisions when financing your home.