The purpose of mortgage insurance is to protect the lender in the event a borrower defaults on a mortgage. But despite the fact that it covers the lender, the costs for private mortgage insurance (PMI) and mortgage insurance premiums (MIP) are passed on to the borrower. You may not like it, but you may not have a choice. If you don’t have a down payment that’s at least 20% of the price of the home you’re buying, mortgage insurance may be the only way you can move forward with the purchase. Lenders consider loans greater than 80% of the property value to be a greater risk, and mortgage insurance would allow them to recover their full investment in case of borrower default. Say what you want about PMI and MIP, but they incentivize lenders to offer loans with down payment requirements as low as 3%.
Fact #2: It’s not cheap.
There is no flat rate for mortgage insurance, but for a conventional loan it’s safe to estimate a monthly PMI charge of about $50 per $100,000 borrowed. This fee is in addition to your monthly mortgage payment, so be sure to factor it in when determining if you can afford a home. Since PMI origination fees and monthly premiums fluctuate and vary from state to state, it’s important to discuss this with your mortgage lender. FHA loans typically come with an upfront mortgage insurance premium (UFMIP) of 1.75% of the home’s value – which can usually be rolled into your monthly total loan amount. The FHA also charges an annual fee based on the amount of down payment you made.
Fact #3: It can be avoided.
Aside from having a down payment of 20% or more, there may be a way for you to avoid paying PMI or MIP. As an alternative, some lenders give borrowers the option of paying a .75% to 1% higher interest rate. Ask your loan representative if they offer this, and do the math to see if it would be more beneficial to you than paying PMI. Piggyback loans are another alternative to mortgage insurance, as long as the blended rate of the two loans isn’t too high. Veterans can opt for a VA loan, which does not require mortgage insurance, and those in rural areas may be able to benefit from a USDA loan.
Fact #4: It’s temporary.
If you determine that paying PMI or MIP is your best option, don’t fret. You won’t be paying this premium forever. In fact, in many cases borrowers can pay the mortgage down enough to stop being charged this insurance in about five years or so. Once you reach the point of having 20-22% equity in your home, your lender is legally required to stop charging you mortgage insurance. You’ll most likely have to pay about $400 to have a professional appraisal performed, but it will be well worth it if you can terminate PMI payments. Those with an FHA loan, however, will be required to pay their mortgage down to 78% of the original purchase price – regardless of whether the home has appreciated in value.
If you have any further questions about mortgage insurance, one of the home loan experts at Cliffco Mortgage Bankers would be happy to help. We can be reached at (516) 408-7300 or contact us here.