Mortgage insurance is often referred to as PMI (Private Mortgage Insurance), but they are a little different.
This weeks Real Vocabulary blog topic is one that most people confuse with Homeowners Insurance. Confusion comes easily as there are a few types of insurance that come up while purchasing real estate: Homeowners, Title, + Mortgage (+ PMI). Mortgage insurance is typically referred to as PMI (Private Mortgage Insurance), but they are a little different. Essentially, one is paid directly to the government and the other is paid to a private company. Which one you receive will be determined by the type of loan you choose to go with, or qualify for. The reason for the insurance is simple: it lowers the lenders risk when giving you a loan that you may not otherwise be able to get. While it lowers their risk it will increase the cost of your loan. If your lender requires mortgage insurance it will be included in the monthly payment that is paid to your lender, your closing costs, or both.
Mortgage insurance (MI) is not required on all loans. The most common loans types that normally require mortgage insurance are FHA and USDA loans. However, down payments less than 20% are also subject to MI. Lenders can also apply MI to conventional loans through a private company. PMI rates, while generally cheaper that FHA, vary depending on your down payment and credit score.
Depending on your situation, MI isn’t a terrible thing. You may not have enough cash saved for a 20% down payment, but its a great time to buy. You may want to keep your cash for a remodel and plan to refinance and remove the MI or PMI at a later date. These scenarios are very important to talk with your lender about to ensure that you get the right loan for your situation.
According to the Consumer Financial Protection Bureau (CFPB) “depending on what kind of loan you get, you’ll pay for mortgage insurance in different ways:
If you get a Federal Housing Administration (FHA) loan, your mortgage insurance premiums are paid to the Federal Housing Administration (FHA). FHA mortgage insurance is required for all FHA loans. It costs the same no matter your credit score, with only a slight increase in price for down payments less than five percent. FHA mortgage insurance includes both an upfront cost, paid as part of your closing costs, and a monthly cost, included in your monthly payment.
If you don’t have enough cash on hand to pay the upfront fee, you are allowed to roll the fee into your mortgage instead of paying it out of pocket. If you do this, your loan amount and the overall cost of your loan will increase.
If you get a US Department of Agriculture (USDA) loan, the program is similar to the Federal Housing Administration, but typically cheaper. You’ll pay for the insurance both at closingand as part of your monthly payment. Like with FHA loans, you can roll the upfront portion of the insurance premium into your mortgage instead of paying it out of pocket, but doing so increases both your loan amount and your overall costs.
If you get a Department of Veterans’ Affairs (VA)-backed loan, the VA guarantee replaces mortgage insurance, and functions similarly. With VA-backed loans, which are loans intended to help servicemembers, veterans, and their families, there is no monthly mortgage insurance premium. However, you will pay an upfront “funding fee.” The amount of that fee varies based on:
- Your type of military service
- Your down payment amount
- Your disability status
- Whether you’re buying a home or refinancing
- Whether this is your first VA loan, or you’ve had a VA loan before
Like with FHA and USDA loans, you can roll the upfront fee into your mortgage instead of paying it out of pocket, but doing so increases both your loan amount and your overall costs.
If you get a conventional loan, your lender may arrange for mortgage insurance with a private company. Most private mortgage insurance is paid monthly, with little or no initial payment required at closing. Under certain circumstances, you can cancel your PMI.”
Purchasing real estate is a big decision. Ask questions, do your research and hire a professional to help you along the way. I am happy to introduce you to a lender, or financial professional that would be a great fit for you and your needs.
You can email me at Krystal@westandmainhomes.com