Buying a home is often a huge financial setback, which is why homebuyers explore various options in order to manage payments systematically. A mortgage is one popular option; it’s a loan made to finance the purchase of a home, and homebuyers can turn to mortgage groups for this.
Under the umbrella of this home financing option is mortgage insurance. Since a considerable amount of money is involved, it’s imperative for lenders or mortgage groups to protect themselves from the inherent risks of funding a mortgage. Homebuyers purchase mortgage insurance as an assurance that the loan made will not be a loss to the lender even if they default on the loan and are unable to repay the debt.
There are two kinds of mortgage insurance: there’s private mortgage insurance (PMI) and there’s mortgage insurance premium (MIP). They are rather similar to each other, so if you’re a tad confused between the two, here is a basic comparison:
PMI – This is for conventional loans.
- This is for borrowers who can only make a down payment of less than 20% of the price of the home.
- The cost to pay for PMI always depends on the size of the DP and the loan, but it’s usually about 0.5% to 1% of the loan made.
- The origination fees and monthly premiums are subject to frequent change; hence, borrowers are advised to gather more information on PMI expenses to avoid confusion with the amounts to be paid.
- For monthly PMIs, borrowers only pay the premium every month until the PMI is terminated, or cancelled because their equity in the home amounts to 20% of the sale price or appraised value (for this, borrowers have to send a letter requesting for cancellation), or they have already reached the midpoint of the amortization period (say, the amortization period is for 20 years; the midpoint is 10 years).
MIP – This is for Federal Housing Administration loans.
- Like the PMI, it is also for borrowers who can only make a down payment of less than 20%.
- The FHA decides whether to charge an upfront mortgage premium of 1.75% the home’s value for new mortgages at the time of closing, or an annual MIP that is calculated (based on the length of the loan and the loan-to-value ratio) every year and paid in 12 installments.
- For loans (made after June 2013) with an original loan-to-value (LTV) of 90% or less, MIP will be paid for 11 years. But for those with LTV greater than 90%, MIP will have to be paid throughout the amortization period.
Mortgage insurance is clearly intended for lenders. It does, however, speed up the purchase process for people who wish to buy a home but cannot raise the 20% down payment. Without the two mortgage insurance options, they won’t be able to borrow the necessary amount to close the deal on a property and may lose out on the chance of owning their dream home.
