Mortgage Insurance - How it works.

One of the questions which I frequently answer is how does mortgage insurance work?

Mortgage insurance is an insurance policy required on loan amounts greater than 80% of the property value (or the sales price, whichever is lower).  The borrower pays for the insurance policy - (see below for more details).  The lender is the beneficiary of the policy if the borrower goes into foreclosure.  Mortgage insurance provides an important vehicle to home ownership - and assists in reducing the risk to lenders, opening up doors to more first time home buyers who may not have 20% down payment funds.

How are MI Rates Determined?

Conventional loans 
MI rates depend on a number of things including (but not limited to) loan size, credit score, down payment amount, property zip code, and term of loan.  Check Radian, a major private mortgage insurer, for additional homeowner resources.

FHA loans – MI rates only depend on the down payment and terms of the loan.  Click here to see FHA mortgage insurance tables.

What is PMI?
PMI is the acronym for Private Mortgage Insurance and is mortgage insurance from a private company. PMI is only used with conventional loans.  FHA loans have mortgage insurance, but it is paid to the federal government-yeah, those guys. There is no private mortgage insurance company involved. It is often mentioned as MI or MIP, not PMI.

When Does MI Go Away?

Conventional loans
PMI automatically goes away when the borrower has 22% equity in the property, based on the purchase price.  The borrower can get it removed earlier if they can prove they have 20% equity in the property, which requires an appraisal.  Most lenders require PMI to be paid for at least 1 year, regardless of the equity situation.  Consult your servicing agent for more guidelines specific to your loan.

FHA loans•
Existing FHA loans:  Automatically goes away when the borrower has 22% equity in the property, based on the purchase price. MI must be paid for 5 years, regardless of the equity in the property.  Borrower cannot get the MI removed early by proving they have sufficient equity.

New FHA MI guidelines go into effect April 1 and June 1, 2013.  (Click Here)

Lender-Paid MI
Some lenders offer loans which do not require. mortgage insurance.  This is true and not true.  The loans (conventional) really do have PMI, but the lender is buying it themselves. Interest rates are higher for no PMI loans.  The catch is the interest rate is for the life of the loan - and never goes down, regardless of the equity the borrower has in the property.  Consult with your mortgage banker to evaluate if this is a good option for your situation.

Miscellaneous tidbits:
VA loans you ask? They never require mortgage insurance, but may require a funding fee.
Can you avoid PMI?  Yes, you may  - ask me how.  More importantly, does it make sense for you?  Case by case and certain criteria/eligibility guidelines will apply.
Jumbo loans?  This is a whole other article.  Call with questions.

Until Next Time,

Craig Turley

Insure peace of mind by consulting with an experienced mortgage banker.  Contact Craig at 480-385-1422 for all your Arizona and California mortgage scenarios.