Depending the type of mortgage you choose, the amount you put down on a loan and the loan to value of the mortgage, you may have to pay mortgage insurance. This insurance protects the lender in the event that you go to foreclosure and the bank cannot recoup the full amount through the auction or sale of the property. So, what is mortgage insurance?
Types of Mortgage Insurance
Conventional Loans: When you take out a conventional loan, the mortgage insurance is private insurance. It’s often referred to as PMI. The lender arranges for a private company to insure the loan. The borrower pays the premium. Mortgage insurance is usually required on a conventional loan when the borrower finances more than 80 percent of the purchase price or value of the property.
Government Loans: All government loans require mortgage insurance. If you opt for an FHA loan, the insurance is referred to as a mortgage insurance premium (MIP). The borrower pays a fee up front and an annual premium. Both of those may be rolled into the mortgage, depending on the lender. The USDA also offers government-backed loans for rural properties. Their mortgage insurance also requires an upfront fee and an annual premium.
The Veterans’ Affairs loan (VA) also requires mortgage insurance; however, theirs is called a funding fee and the borrower pays only once. This fee may also be rolled in the loan, depending on the lender.
Mortgage Insurance Tips and Warnings
Keep in mind that the mortgage insurance does not protect you. It protects only the lender, should the borrower default on his or her loan. However, the borrower does see some benefits from mortgage insurance:
- Mortgage insurance lowers the risk to the lender, thus, the borrower may be able to qualify for a loan that he or she may not have otherwise qualified for.
- In some cases, once the borrower pays off some of the loan, he or she may be eligible to cancel the mortgage insurance policy.
- Mortgage insurance allows a borrower to put less money down, thus the borrower doesn’t have to save as long to get a mortgage.
- The mortgage insurance give the borrower more buying power. If you put down 20 percent, mortgage insurance allows the borrower to afford a larger mortgage.
- The borrower has the ability to put less down and keep the cash that would have otherwise been used for the down payment for paying off debts and making improvements.
In some cases, lenders may offer the borrower a “piggyback” second mortgage. Usually, the option is marketed as a cheaper alternative to mortgage insurance. However, depending on the circumstances, that may not be true. Always compare the total cost of the mortgage insurance and the cost of the second mortgage before making this decision.
Choosing a Conventional Loan or Government-Backed Loan
If your finances allow you to choose whether you use a conventional loan or a government-backed loan, compare the overall costs of the loan. A conventional loan without PMI may cost less or have lower monthly payments than a government-backed loan with mortgage insurance. Government-backed loans are always going to have a mortgage insurance premium attached to them. You may be better off going with a conventional loan – again, depending on your situation and finances.
Contact On Point Carolinas Realty
If you are ready to purchase a new home, contact our agents at On Point Carolinas Realty to help you look for a home. Our agents will also help you through the buying process and will try to answer any questions you might have about how private mortgage insurance or government-backed loans such as FHA and VA loans work.