What is Mortgage Insurance and How does it work?

Mortgage Insurance protects the lender in the event that a borrower falls behind on payments or defaults on the mortgage loan. It is not a protection for borrowers, but the costs are incurred by borrowers. This is a fee that you want to get out of as soon as you can and we will go over how to do that here.

First we need to go over the different types of mortgage insurance. This is broken down by the loan program you are eligible for.

FEDERAL HOUSING ADMINISTRATION (FHA) MORTGAGE INSURANCE PREMIUM (MIP)

CONVENTIONAL LOANS - PRIVATE MORTGAGE INSURANCE (PMI)

VETERAN AFFAIRS (VA) - BACKED LOAN

US DEPARTMENT OF AGRICULTURE (USDA) MORTGAGE INSURANCE

PIGGY BACK LOANS

Conventional Loans - Private Mortgage Insurance (PMI)

Getting out of Private Mortgage Insurance is all about the loan to value of the home - if your loan balance is within 80% of the value of the home, you are eligible to get out of mortgage. If you were to put a 20% down payment when you purchase the home you will get out of mortgage insurance right away!

For a lot of people, especially first time home buyers, 20% is a large chunk of money upfront. If you give less than 20%, it's okay, but you will have to pay mortgage insurance until you pay the mortgage balance down to that 80% loan to value mark.

Your home value appreciates each year in value - In 2019, the United States average home appreciation rate was 3% - 5%. If your home value was $200,000 in January 2019 it could be closer to $210,000 in January 2020. Between making monthly payments and home appreciation the gap between widens the loan to value mark, so you may be eligible to get out of mortgage insurance a bit quicker than you think.

There are a few different ways you can pay mortgage insurance with a Conventional Loan.

1

Through your monthly payment - this is the most common way.

The rate of mortgage insurance heavily depends on your credit scores, the down payment, and your debt-to-income ratio. This costs will be added into your monthly payment until you have the 80% loan to value. The rate is typically cheaper than FHA mortgage Insurance, especially with borrowers with 660+ credit scores.

2

Upfront Mortgage Insurance or Borrower Paid Mortgage Insurance

There is the option to pay for the mortgage insurance upfront, so that you don't have the monthly payment. On average, this is more expensive than paying the monthly payment PMI, but sometimes, especially if you have a down payment between 10% - 19.99%, it may make sense to pay this upfront. We are able to roll this cost into your loan amount at Supreme Lending.

3

A Combination of both

You can pay a bit upfront to lower your monthly payment PMI rate, which lowers your monthly payment.

Final Thoughts on Conventional PMI

If you put less than 20% down when you purchase the home your mortgage lender will not drop your mortgage insurance until your loan to value is 78% - Once you get to the 80% LTV mark you can request to have your mortgage insurance dropped, so keep an eye out for what homes are selling for in your area and what your mortgage balance is. You can even ask a Real Estate Agent to check your home value for you.

Federal Housing Administration (FHA) Mortgage Insurance Premium (MIP)

An FHA mortgage is "Insured" by the Federal Housing Administration, aka - the government, who also requires mortgage insurance. This is a bit different than Conventional Mortgage Insurance. Credit scores have nothing to do with the premiums. The more you put down the less it will be, but it's the same premiums for everyone besides that. FHA Mortgage Insurance does not fall off once you have 80% loan to value - it will last for another 11 years, which means that if you put a 20% down payment upfront you would still have mortgage insurance for the next 11 years. The only way to get out of this is to switch to a different loan type such as a Conventional loan, or wait the 11 years.

Along with the monthly payment MIP, which is typically higher than Conventional premiums, there is Upfront Mortgage Insurance of UFMIP - this is 1.75% of the loan amount and is rolled into the mortgage, which increases your monthly payment.

Final Thoughts on FHA MIP

An FHA loan is great for people wanting to buy a home with lower credit scores. If you have a 660 or lower credit score chances are you will actually save on the monthly payment with an FHA loan. Ideally you will want to try for the Conventional loan.

Veteran Affairs (VA) - Backed Loan

The V.A. is another government program that does not have monthly payment mortgage insurance, instead you will pay an upfront "Funding Fee" - very similar to the FHA UFMIP. The only difference is that the V.A. Funding Fee is more expensive. This fee varies on the down payment, the type of veteran, and if you've ever used V.A. Financing before. A popular program that the V.A. offer is 100% Financing - which means no down payment. If you were in the regular military using the V.A. loan for the first time the Funding Fee would be 2.15% of the loan amount.

If a Vet was injured in the line of duty, or a surviving spouse of a vet who passed in action the V.A. will exempt you from paying the Funding Fee.

US Department of Agriculture (USDA) Mortgage Insurance

This is similar to the FHA Mortgage Insurance Premium, but is typically cheaper. You'll have to pay an upfront "Guarantee fee" of 1% of the loan amount, which is rolled into the loan, and you also have to pay an annual fee of .35% of the loan balance. The Annual fee will be included into your monthly payment, so it’s comparable to monthly payment mortgage insurance. A USDA loan is very beneficial because, like a V.A. loan they accept 100% financing - no money for a down payment and the mortgage insurance is cheap. The caveat to this is that you have to be in an eligible rural area to qualify. Check out the the eligibility map to find your home.

Piggy Back Loans

An alternative to paying mortgage insurance is to find a second mortgage to get to that 80% Loan-to-value mark quicker. A popular program is a 80/10/10 loan, which means that you put a 20% down payment on a first mortgage to get you out of mortgage insurance and then find a home equity line of credit or a second mortgage to pay for 10% of the home value and then you only pay a 10% down payment. Some lenders will accept a 80/15/5 loan, so that after the two loans you are only paying a 5% down payment. This does come with a cost though - most second mortgages will charge more closing costs and will have a higher interest rate then the first mortgage

Have Questions?

Read our other blog posts or reach out to us directly.

Benson Ringle
Loan Officer NMLS #1516626
GA Lic. # 1516626
(218) 507-0429
Benson.Ringle@supremelending.com