When is mortgage insurance typically required?

PMI is an acronym for private mortgage insurance. Many people confuse pmi with mip (mortgage insurance premium). There is a difference. Private mortgage insurance is associated with "conventional" home loans. MIP relates to the government back FHA and USDA loan programs.

Private mortgage insurancePMI is not life insurance. People often mistake mortgage insurance with mortgage life insurance that pays off the mortgage should the owner(s) pass away.

If you’re taking out a mortgage that is underwritten to either Fannie Mae or Freddie Mac guidelines (guidelines are rules) . . . and have less than a 20% down payment, the mortgage company will typically require you to purchase “private mortgage insurance”. When a borrower does not have the twenty percent down payment, the lender reaches out to a "private mortgage insurance" company. The mortgage insurance company will guarantee the lender the difference between the buyer's down payment and the required 20%. For example, if you have a 5% down payment, the mortgage insurance company will insure or guarantee the down payment shortage of 15% to the lender. Now when a foreclosure occurs, the lender seeks reimbursement from the mortgage company for the down payment shortfall.

Why does the mortgage company require a 20% down payment?

The mortgage lender requires a 20% down payment because over the years lenders have found that they can (usually) sell a home at a foreclosure auction for 80% of the value of the home. For example, let’s say the home is valued at $100,000, and the home buyer puts 5% down . . . and the insurance company guarantees 15%, the bank or mortgage company can auction the home for 80,000 and can expect a quick sale because the home sold originally for $100,000. Who wouldn’t take a deal like that? Buy a home for 80,000 that’s worth $100,000. The lender doesn’t lose, because they took your 5, 10, 15 percent down payment and the difference between your down payment and twenty percent is paid by the insurance company. For example . . .

How long do you pay pmi?

The time period depends on the loan balance. You must have paid down the mortgage balance to 80% of the home's original appraised value (20% equity) to request remove or cancellation of the pmi premium PMI. The federal government requires lenders to remove the pmi cost when the loan balance drops to 78% of the original appraised value.

Do you have to refinance to get rid of pmi?

Refinancing is certainly one way to eliminating the pmi premium, although, it might be cheaper to just pay down the mortgage to 80% of the original home value. See pay down calculator

How long does mortgage insurance last?

Using an amortization program, here is an approximate amount of time to eliminate the private mortgage insurance premium:

Sales PriceDown PaymentLoan AmountInterest RateTermNumber of Years
100,0005%$95,000 5%30 Years8.75
100,00010%$90,000 5%30 Years6.50
100,00015%$85,000 5%30 Years3.67

Do you pay pmi with a VA loan?

Veterans are not required to pay pmi on the veteran loan. There is an upfront funding fee that is paid with the VA loan. There are no monthly pmi or mip charges

How much does private mortgage insurance typically cost?

The private mortgage insurance premium is based on your credit score, down payment, and location of the home. Some home buyers pay a higher premium if the home is located in a high foreclosure state, or zip code. Other premium considerations are the size of the loan, loan term (15 or 30 years), and whether home buyer will occupy the home as a primary residence or if the home is a second home. The pmi cost is also based on the payment plan. Home buyers can pay the pmi insurance monthly, along with their mortgage payment; pay the premium in full, or split the difference . . . pay some upfront and a smaller amount each month. Another option is a plan called “Lender Paid MI”. The lender will pay the mortgage insurance premium on your behalf, but here’s the catch, the interest rate is a bit higher (they never lose either).

How do I calculate the PMI premium?

Most home buyers choose the monthly plan, so assume you purchase a home for $100,000 with 5% down payment ($5,000). Your mortgage amount will be $95,000 ($100,000 - $5,000 = $95,000).

How to get rid of pmi insurance?

The Federal Homeowners Protection Act requires borrower paid MI be cancelled automatically once the borrower has paid down the loan to an loan to value of 78%, based on the original value of the property. In other words, if your loan is 78% or less of the sales price, you may be able to cancel the pmi.

For example: $100,000 (sales price) X .78 = $78,000. If your mortgage balance is 78% or less and you’re still being charged pmi, call you lender to have the pmi removed.

Borrower paid MI may also be cancelled at the borrower’s written request once the principal balance is paid down to 80% of the original purchase price; subject to the Homeowners Protection Act.

What is MIP? Is it the same thing?

Up to this point we have been talking about “private mortgage insurance”. MIP stands for mortgage insurance premium. MIP is charged by Federal Housing Administration for FHA loans. The United States Department of Agriculture also charges a small monthly mip fee for USDA loans.