- Mortgage Insurance Basics
- FHA Mortgage Insurance
- Private Mortgage Insurance
- Mortgage Insurance Premiums
- Mortgage Insurance Cancellation
FHA loans require mortgage insurance (MI) regardless of how much money you put down. Learn how much PMI costs and how to cancel it.
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Mortgage Insurance Basics
Mortgage insurance is a type of insurance that homebuyers are required to purchase if they’re using a conventional loan to finance their home purchase. Mortgage insurance is intended to protect the lender in the event that the borrower defaults on their loan.
Define Mortgage Insurance
Mortgage insurance is a policy that protects lenders against financial loss in the event that a borrower defaults on their home loan. Mortgage insurance is typically required when a borrower makes a down payment of less than 20% of the purchase price of their home.
Borrowers who are required to purchase mortgage insurance will typically pay for it in the form of a monthly premium, which is added to their regular mortgage payment. The amount of the premium will depend on various factors, such as the size of the loan, the term of the loan, and the down payment amount.
How Mortgage Insurance Works
Mortgage insurance is required on all Federal Housing Administration (FHA) loans. FHA loans are a type of government-backed home loan that helps first-time or low-to-moderate income borrowers achieve homeownership. Borrowers with FHA loans must pay two types of mortgage insurance premiums: upfront mortgage insurance premium (UFMIP) and annual mortgage insurance premium (MIP).
UFMIP is a one-time fee that’s paid at closing. MIP is an annual premium that’s split into 12 monthly payments and added to your monthly mortgage payment. FHA borrowers who put down less than 10% of the purchase price of their home are required to pay UFMIP and MIP for the life of their loan. Borrowers who put down 10% or more can cancel their MIP after 11 years.
Mortgage insurance protects the lender, not the borrower, if the borrower stops making their loan payments. If the borrower defaults on their loan, the lender will use mortgage insurance to cover a portion of their losses. Mortgage insurance also allows borrowers to qualify for loans they might not otherwise be able to afford by decreasing the amount of money they need to put down.
FHA Mortgage Insurance
FHA Mortgage Insurance is a mandatory insurance policy for all FHA loans. It’s usually a one-time premium that’s paid at closing, but it can also be financed into the loan. The annual premium is divided into 12 monthly payments and is paid with your mortgage payment.
Types of FHA Mortgage Insurance
There are two types of mortgage insurance required by the Federal Housing Administration (FHA): an upfront mortgage insurance premium (UFMIP) and an annual mortgage insurance premium (MIP).
The UFMIP is a one-time fee charged at closing, while the MIP is an ongoing fee that is included in your monthly mortgage payment. FHA loans with a down payment of less than 10% require both UFMIP and MIP.
How Much is PMI on an FHA Loan?
The amount of PMI (private mortgage insurance) on an FHA loan varies depending on the size of the down payment, the loan term, and the borrower’s credit score. For loans with the minimum 3.5% down payment, borrowers are required to pay annual premiums of 0.85% of the loan balance. These annual premiums are divided into 12 monthly installments and added to your monthly mortgage payment.
For loans with down payments between 5% and 10%, borrowers are required to pay annual premiums of 1.05% of the loan balance. Borrowers with down payments greater than 10% are not required to pay mortgage insurance premiums.
The following table shows the monthly PMI costs for a 30-year fixed-rate mortgage with a 3.5% down payment and a borrower’s credit score ranging from 580 to 679:
|Credit Score|Monthly PMI Cost|
|580-619 |$142 |
|620-679 |$96 |
Private Mortgage Insurance
Private mortgage insurance is required on all FHA loans unless 20 percent equity already exists in the home at the time of the loan funding. Therefore, if you buy a home with an FHA loan that has a purchase price of $200,000, and you put down the minimum required 3.5 percent down payment, your base loan amount will be $193,750. The monthly mortgage insurance premium (MIP) is determined by loan term and loan-to-value ratio in addition to the base loan amount.
Types of Private Mortgage Insurance
There are several types of private mortgage insurance (PMI) available to homebuyers today. Here’s a quick overview of each:
-Borrower-paid PMI: You’ll pay monthly premiums for this type of PMI, which is the most common. The amount you pay will be based on factors like your loan type, loan terms, credit score and down payment amount.
-Lender-paid PMI: With this type of PMI, the lender agree to pay your monthly premiums in exchange for a higher interest rate on your loan.
-Single premium PMI: This unique type of PMI allows you to pay your entire premium upfront, at closing. Your premium will be based on factors like your loan type and credit score.
Depending on your loan program and lender, you may be able to cancel your PMI once you reach a certain level of home equity. For example, with FHA loans, you can cancel your PMI once you reach 78% loan-to-value ratio.
How Much is PMI on a Private Loan?
Private Mortgage Insurance, or PMI, is insurance that lenders require borrowers to have when they get a mortgage and don’t have a down payment of at least 20% of the home’s value. So if you buy a home for $250,000, you would need to put down at least $50,000 to avoid having to pay PMI.
The reason that lenders require PMI when the borrower has less than 20% equity in the home is because they are worried that the borrower might not be able to pay back the loan. The thinking goes that if the borrower can’t come up with a down payment, they might not be able to make their monthly loan payments either.
The good news is that you can get rid of PMI once you have paid off enough of your loan so that you owe less than 80% of what your home is worth. So if you bought that same $250,000 home and made $30,000 in payments towards your loan, you would only owe $200,000. Once your loan balance falls below 80% of what your home is worth, your lender is required by law to cancel your PMI.
If you want to get rid of PMI sooner, you can make additional payments towards your principal balance above and beyond your regular monthly payment. With each extra payment that you make, you will chip away at the amount of equity that you have in your home which will help you reach the 20% mark faster and get rid of PMI sooner.
Mortgage Insurance Premiums
Mortgage insurance is required on all FHA loans unless 20% equity already exists in the home at the time of the loan funding. Regardless of the value of a home, most lenders require private mortgage insurance (PMI) for loans where the down payment is less than 20%.
Upfront Mortgage Insurance Premium
The upfront mortgage insurance premium (UFMIP) is a fee that’s charged by the Federal Housing Administration (FHA) to provide protection for lenders against some or most of the potential losses that can occur when a borrower defaults on an FHA-insured mortgage loan.
Annual Mortgage Insurance Premium
The FHA requires that all borrowers pay an annual mortgage insurance premium (MIP) as part of their monthly mortgage payment. The MIP is a percentage of the loan amount and is paid by the borrower upfront and annually for the life of the loan. The amount of the MIP varies depending on the loan amount, term, and down payment. In 2020, the MIP for a 30-year FHA loan with 3.5% down is 0.85%.
Mortgage Insurance Cancellation
You may have the option to cancel mortgage insurance on your FHA loan if your lender follows the right steps and your loan meets the right criteria. You can also avoid paying for mortgage insurance by making a larger down payment on your home. Read on to learn more about how to cancel mortgage insurance on your FHA loan.
Automatic Mortgage Insurance Cancellation
Mortgage insurance is required on all FHA loans unless 20% equity already exists in the home at the time of the loan funding. Otherwise, borrowers must wait for the loan balance to achieve 22% equity levels through standard appreciation and/or principal paydowns to cancel their mortgage insurance premium. The annual MIP rate is adjusted annually based on a table from HUD.
Requesting Mortgage Insurance Cancellation
If you have a government-backed loan, such as an FHA loan, you’re required to pay mortgage insurance (MI). MI protects the lender in case you default on your loan and is usually required if you have a down payment of less than 20%.
You pay MI as part of your monthly mortgage payment. If you have an FHA loan, you’ll also be required to pay an upfront premium when you close on your loan.
You may be able to cancel your mortgage insurance once you reach 20% equity in your home. To cancel, you’ll need to request it in writing from your lender and provide proof that your home has increased in value and that you have the ability to make your mortgage payments without MI.