When it comes to buying a home, many individuals are unable to put down the recommended 20% down payment. This leads to the need for mortgage insurance, which protects the lender if the borrower is unable to make their mortgage payments. There are several different types of mortgage insurance, and it is important to understand each type to make an informed decision about which one is right for you.
Mortgage insurance is a type of insurance policy that protects the lender if the borrower is unable to make their mortgage payments. If the borrower defaults on their mortgage, the lender can file a claim with the mortgage insurance company to recover their losses. Mortgage insurance is typically required for borrowers who put down less than 20% of the purchase price of their home.
Private Mortgage Insurance, or PMI, is a type of mortgage insurance that is required for conventional loans. PMI is typically required for borrowers who put down less than 20% of the purchase price of their home. The cost of PMI is typically between 0.3% and 1.5% of the original loan amount, and is paid monthly. The cost of PMI varies depending on the borrower’s credit score, the loan-to-value ratio, and other factors.
Federal Housing Administration, or FHA, loans are designed to help low-income and first-time homebuyers. FHA loans require a down payment of only 3.5%, but they also require mortgage insurance in the form of a Mortgage Insurance Premium, or MIP. The cost of MIP varies depending on the loan amount, the loan-to-value ratio, and the term of the loan. MIP is paid both upfront and monthly.
The Department of Veterans Affairs, or VA, offers home loans to veterans and active-duty service members. These loans do not require a down payment, but they do require a funding fee, which is a type of mortgage insurance. The funding fee varies depending on the type of loan, the size of the down payment, and the veteran’s service record. The funding fee can be paid upfront or rolled into the loan.
Lender-Paid Mortgage Insurance, or LPMI, is a type of mortgage insurance that is paid for by the lender. LPMI is typically only available for borrowers who have a good credit score and are putting down less than 20% of the purchase price of their home. The cost of LPMI is typically higher than the cost of PMI, but it does not require a monthly premium.
Borrower-Paid Mortgage Insurance, or BPMI, is a type of mortgage insurance that is paid for by the borrower. BPMI is typically required for borrowers who put down less than 20% of the purchase price of their home. The cost of BPMI is typically lower than the cost of LPMI, but it requires a monthly premium.
To calculate mortgage insurance, you need to know the loan amount, the loan-to-value ratio, and the type of mortgage insurance you have. Here's how to calculate mortgage insurance payments for each type of mortgage insurance.
To calculate the monthly PMI payment, you'll need to multiply the loan amount by the PMI rate (which is typically between 0.3% and 1.5% of the original loan amount per year) and divide by 12. For example, if you have a $200,000 loan with a PMI rate of 1%, your monthly PMI payment would be $166.67 ($200,000 x 0.01 / 12).
To calculate the upfront MIP payment, you'll need to multiply the loan amount by the upfront MIP rate (which is currently 1.75% of the loan amount) and add it to the loan amount. For example, if you have a $200,000 loan, your upfront MIP payment would be $3,500 ($200,000 x 0.0175).
To calculate the annual MIP payment, you'll need to multiply the loan amount by the annual MIP rate (which varies based on the loan-to-value ratio and the term of the loan) and divide by 12. For example, if you have a 30-year loan with a loan-to-value ratio of 95%, your annual MIP rate would be 0.85%, and your monthly MIP payment would be $142.50 ($200,000 x 0.0085 / 12).
To calculate the VA funding fee, you'll need to multiply the loan amount by the funding fee rate (which varies based on factors such as the type of loan, the down payment amount, and whether it's the borrower's first or subsequent use of a VA loan). For example, if you have a $200,000 loan with a 0% down payment and it's your first use of a VA loan, your funding fee would be 2.3% of the loan amount, or $4,600 ($200,000 x 0.023).
The LPMI premium rate is typically higher than the PMI rate charged on borrower-paid mortgage insurance (BPMI) since the lender is assuming the cost of the insurance. The LPMI premium rate can be expressed as a percentage of the loan amount or as a fraction of a percentage. For example, a premium rate of 0.5% would be equivalent to 50 basis points (BPS).
Once you have the necessary information, you can calculate the LPMI payment using the following steps:
For example, if you have a $200,000 loan with a 30-year term and a total interest rate of 5.0%, your monthly payment would be $1,073.64.
It's important to note that the lender is paying the LPMI premium upfront, so the monthly payment will not include a separate PMI payment. The total monthly payment will be higher than it would be with BPMI, however, since the interest rate is higher.
To calculate the BPMI payment, you'll need to multiply the loan amount by the BPMI rate (which is typically between 0.3% and 1.5% of the original loan amount per year) and divide by 12. For example, if you have a $200,000 loan with a BPMI rate of 1%, your monthly BPMI payment would be $166.67 ($200,000 x 0.01 / 12).
Keep in mind that mortgage insurance payments may vary based on factors such as the loan amount, the loan-to-value ratio, the term of the loan, and the type of mortgage insurance you have. It's important to consult with your lender or a mortgage professional to get an accurate estimate of your mortgage insurance payments.
Mortgage insurance can be cancelled in several ways. For PMI, the insurance can be cancelled once the borrower’s loan-to-value ratio reaches 78% or less. The borrower must also have a good payment history and meet other requirements. For FHA loans, the insurance can be cancelled once the borrower’s loan-to-value ratio reaches 78%, but the borrower must have made at least 60 monthly payments and meet other requirements. For VA loans, the insurance cannot be cancelled, but it does end once the loan is paid in full.
There are several ways to avoid mortgage insurance altogether. One way is to make a larger down payment. If the borrower can put down 20% or more of the purchase price of their home, they will not need to pay for mortgage insurance. Another way to avoid mortgage insurance is to get a piggyback loan, which is a second mortgage that is used to cover the down payment. This can be a good option for borrowers who have good credit and are able to make the payments on both mortgages.
Mortgage insurance is an important part of the homebuying process, especially for borrowers who are not able to put down the recommended 20% down payment. Understanding the different types of mortgage insurance and how they work can help borrowers make an informed decision about which type of mortgage insurance is right for them. Whether you choose PMI, MIP, LPMI, or BPMI, it is important to calculate the cost of the insurance and factor it into your monthly mortgage payment.