Mortgage insurance is generally required to protect any loan taken out to purchase a home based on the loan to value and loan product. This will protect the lender in the event that you are unable to pay. Insurance of this type is beneficial not only for the lender, it enables the borrower to put a smaller down payment and make a much larger purchase.
As a consumer, there are certain things you need to know about mortgage insurance. Firstly, there are two different types of mortgage insurance. The type known as Private Mortgage Insurance (PMI) is offered in conjunction with private lenders. This type of insurance offers very strong coverage to the lender in case of default on a mortgage and provides peace of mind to the lender. The second type known as Mortgage Insurance Premium (MIP) is used for all government loans, including FHA and VA lending. The payment process for insurance of this type varies slightly from that of PMI.
Secondly, it is useful to understand the qualifications of the policies to ensure that you are getting what you need. The PMI coverage is a requirement for conventional loans if the down payment is less than 20 percent of the loan amount. What does that mean for a home buyer? For example if you are looking to buy a home in Maryland for $400,000 with a 10 percent down payment then you can expect your PMI coverage to be approximately 0.5 percent of the loan amount, or $150 per month. Coverage of this type favors the lender, however depending on your loan this could very well be the best option. It is important to do your homework, explore all available options and familiarize yourself with each policies individual conditions.
The MIP option used for government loans, this is because FHA-insured loans require a smaller down payment. That means insurance of this type is required 100 percent of the time when using FHA-insured financing. With the down payment of only 3.5 percent this type of financing is appealing to many home buyers and so requires its own specific insurance. The payment is also slightly different from that of the regular monthly payment associated with PMI insurance. There is an Upfront Mortgage Insurance Premium (UFMIP) equal to 1.75 percent of the loan amount due at closing. The lenders in Maryland will generally factor this cost into the financing and pay it directly to FHA on the buyer’s behalf. This type of insurance also comes with a monthly payment or premium that is calculated based upon the Loan-To-Value Ratio (LTV Ratio). Simply put that is the difference in the amount borrowed and the property’s value. For example a loan of $260,000 use to purchase a home valued at $300,000 would equal to $260,000/$300,000 or 87 percent representing the LTV Ratio.
Thirdly, understanding when it is time to terminate coverage. There are several requirements for a PMI policy that will need to be met when considering canceling your coverage. The first deals with the LTV Ratio which must meet or exceed 78 percent, in other words 22 percent equity. The equity or value owned of your property is exactly what it sounds like, how much you own vs. how much you owe. Being current on your mortgage payments is also a requirement when thinking about canceling. It is important to know your loan type, because certain types of high-risk loans may have additional or varying termination requirements.
The MIP has certain qualifications that need to be met also when thinking about canceling. Remembering that FHA and VA loans only qualify for MIP insurance, the two things necessary to know are the loan term and current policy start date. The standard 15 and 30 year loan terms that started prior to June 3, 2013 can both be canceled with a LTV Ratio of 78 percent however the 30 year term requires the MIP be paid for a minimum of 60 months with the 15 year term having no such requirement. The LTV Ratio calculation for an MIP policy uses the last known property value and does not require an appraisal, this can often mean that the purchase price is used even years later. If your MIP policy began after June 3, 2013 then there are a new set of regulations. With loan terms of 15 and 30 years the new requirements state that MIP coverage will be paid for a minimum of 11 years, and if the LTV Ratio is under 90 percent then MIP coverage will be paid for the entire term of the loan.
One thing to consider is that if you carry mortgage insurance from a previous purchase or refinance there are programs available with very favorable rates that allow you to refinance out of the mortgage insurance with less than 20% down. These lender paid mortgage insurance programs seem to save hundreds on many refinances that we have originated in the past 12 months. So if you have a mortgage in Maryland that has mortgage insurance on it PMI or MIP please give me a call at 410-827-5111 to check to see if we can save you hundreds monthly.
There are many factors to consider when deciding what type of mortgage program is right for you, and volumes of information on the subject. That is why the single most important thing to do is to contact a licensed mortgage broker who can provide professional guidance and help get exactly what you need. One such professional is Peter Dellane, who is licensed by the State of Maryland to provide mortgage loans. He can be reached by phone at 410-827-5111 or via email at peter@peterdellane.com.
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