Private Mortgage Insurance and Mortgage Insurance premium
Private Mortgage Insurance
It is a type of mortgage insurance required to be paid by the borrower of a conventional loan. This insurance protects the lender if the borrower stops paying the mortgage. These are arranged by the lender and offered by the private insurance companies. A borrower making less than 20% down payment on a home loan is typically required to purchase private mortgage insurance or who has Loan to value ratio higher than 80% on a mortgage.
Loan to value ratio - Loan to value ratio is assessed to calculate the lending risk of the lender. The loan amount is divided by the appraised value of the home. For example, if the appraised value of the home is $100,000 and the borrower is making a down payment of $20,000, then the LTV is 80%.
Most lenders give the best interest rates for the borrowers with good credit score and LTV ratio equal to or below 80.
The premium is usually added to the monthly mortgage.
The lender will provide a Loan Estimate to the borrower to get an idea of what the mortgage payments are going to look like.
The PMI is shown on the Loan Estimate and Closing Disclosure.
In the event that the Mortgage insurance premium is paid upfront during the initial loan term, the premium may not be refunded if the mortgage is refinanced.
The monthly mortgage insurance is usually canceled automatically by the lender once the equity of the home reaches 78% LTV or the borrower may also request the lender to cancel the premium mortgage insurance once the equity reaches 80%.
It helps the borrower to be qualified for the higher loans with lower down payments, but the cost of the loan might be increased.
There are 4 types of premium mortgage insurance such as
Borrower paid mortgage insurance - This is the most common type of mortgage insurance where the borrower pays it as an added monthly fee to their mortgage payment. This can be removed automatically if the equity reaches 78% or the borrower may request PMI to be canceled once the equity reaches 80% or the borrower may refinance the home to remove the PMI.
Lender paid mortgage insurance - In this type of insurance, the lender pays for the mortgage insurance entirely and in turn charges the borrower with a slightly increased interest rate. This insurance cannot be canceled when the equity reaches 78% as it is built into the loan. The lender paid insurance is non refundable.
Single premium mortgage insurance - In this type of insurance, the entire mortgage insurance is paid in a single payment. It may either be paid as an upfront insurance amount or may be rolled into the the mortgage as a monthly payment. The advantage of this type of insurance is that the monthly mortgage premium is lower when compared to the Borrower paid mortgage insurance.
Split premium mortgage insurance - This is the least common type of insurance where it acts as a hybrid of borrower paid mortgage insurance and single premium mortgage insurance. This is done by paying a part of monthly mortgage insurance upfront and a part of it with the monthly mortgage payment. This is an advantage for the borrowers who have high debt to income ratio where increasing the monthly payment too much would disqualify the borrower to be eligible for the loan.
Mortgage Insurance premium
Mortgage insurance premium is used in the loans underwritten by Federal housing administration (FHA). This is an insurance premium charged by the lenders for the borrowers who take out loans backed by Federal Housing Administration. This is charged by the lenders to offset a low down payment made by the borrower. FHA loan can be obtained by making a down payment as low as 3.5% and a minimum credit score of 580. In the event of a Homeowner's death, the mortgage insurance premium pays off their mortgage debt.
Usually, there are two premiums paid - an upfront fee and an annual fee. The upfront fee is usually 1.75% of the loan amount.
Some lenders may allow the cancellation of mortgage insurance premium after 11 years if at least 10% down payment has been made.
This can be paid either as an upfront fee or may be rolled into the mortgage for the entire term of the loan.
The monthly premium added to the monthly payments in addition to the upfront fee varies usually from 0.45% - 1% of the loan amount per year.
These monthly premiums differ based on various factors such as loan amount, size of the FHA down payment, the length of the loan term.
The mortgage insurance premium does not vary based on credit score.
The upfront and monthly mortgage insurance costs increase the overall loan amount and the monthly mortgage payments.
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