Written By: Glenn Michaels, Op-Ed Writer
What are the different types of mortgage insurance? There are two types of mortgage insurance, Private Mortgage Insurance (PMI) for conventional borrowers that put less than a 20% downpayment and the other program is FHA insurance regardless of the down payment and loan term. The VA mortgage has a funding fee and the funding fee serves as a guaranty, not an insurance fee. All three programs in the event the borrower defaults on the mortgage the lender can file a claim with the Private Mortgage Insurance Carrier, the FHA or VA and the lender will be paid off unless there was borrower/lender fraud.
Who is required to have mortgage insurance? Conventional loans (loans that are not insured or guaranteed by the government) are required to have private mortgage insurance if they put less than 20% down. If the borrower finances the home purchase with either a FHA insured mortgage or VA guaranteed loan the borrower must have either mortgage insurance or a loan guaranty.
What does mortgage insurance cost? The private mortgage insurance rates vary by loan type, state where property is located, loan term, and the percentage of funds down on the house. The FHA requires that a borrower pay an upfront mortgage insurance premium of 1.75% off the base loan and an annual mortgage insurance premium depending on the term of the mortgage and the percentage down on the house.
What does mortgage insurance cost and when is it paid? Usually the mortgage insurance premium is paid monthly when the monthly mortgage payment is paid. The upfront mortgage insurance premium for FHA can be financed in full at the closing or paid in full at the closing. The VA funding fee can be financed in full at the closing or paid in cash. Most borrowers finance the upfront mortgage insurance premium for FHA loans and finance the VA funding fee for VA loans.
Why do I need mortgage insurance? Your lender requires you to have mortgage insurance so that if the borrower no longer makes the required mortgage payments and falls into default, the lender will be paid through the insurance.
How can I avoid paying mortgage insurance? If you finance your home purchase with a conventional mortgage and the downpayment is 20% or more the private mortgage insurance is not required at all. Borrowers that take FHA financing on their home purchase cannot avoid the mortgage insurance. All FHA borrowers are required to pay an upfront and annual mortgage insurance premium paid monthly. All honorably discharged veterans except for the veterans and active due members that are exempt from the VA funding fee must pay an upfront VA funding fee. The VA hs no annual funding fee paid monthly.
When does mortgage insurance fall off the loan? The private mortgage insurance premium must stop when the borrower reaches 22% equity position based on the original appraised value. The FHA annual mortgage insurance premium may or may not fall off the loan. It is depending on the original term and loan to value. Borrowers that bought a home with FHA financing at 96.5% (3.5% down) for a thirty year term will pay the mortgage insurance for the term of the mortgage.
Mortgage insurance is expensive. However, the costs have been tax deductible for the most recent years. The mortgage insurance premium for a long time was not tax deductible. Will congress keep it tax deductible? Your guess is as good as mine.
About The Author
Glenn Michaels - As an op-ed writer, Glenn Michaels is a mortgage underwriting instructor for CampusUnderwriter (www.MortgageUnderwriter.org). As a BBA & FHA DE Underwriter, Glenn is a Pace University graduate who also graduated from New York University’s School of Mortgage Finance. Glenn has conducted numerous training classes and has worked in the mortgage banking industry for 38 years.
