If you are purchasing a home with less than a 20% down payment, your mortgage lender will require private mortgage insurance (PMI) to mitigate their lending risk. PMI does add costs to your loan, however homeownership is still a great way to build wealth
. Do not delay homeownership because you lack a 20% cash down payment.
Three types of mortgage insurance exist, and below we offer the pros and cons of each.
Borrower-Paid Mortgage Insurance
is available for conventional loans and is calculated as a small percentage (=/<1%) of your loan amount per year. This is divided by 12 months and added to your monthly payment.
Mortgage insurance does increase your monthly mortgage payment, but you will not pay it forever. Lenders are required to end PMI once you have 22% equity in your home. If you believe the market value of your home has gone up, you may ask to have the home appraised and your loan-to-value ratio evaluated.
Lender-Paid Mortgage Insurance
is calculated similarly but offers a lower payment in exchange for a higher interest rate. The lender will cover the cost of your insurance but will recover those costs by charging a higher interest rate. This type of mortgage insurance is for the life of the loan. It may be advantageous to refinance the home once you have reached an 80% loan-to-value ratio.
FHA* Mortgage Insurance Premium (MIP)
is a type of mortgage insurance required when obtaining an FHA loan. FHA loans are backed by the Federal Housing Administration and are designed to increase homeownership through flexible qualifications such as a low-down payment.
MIP is like other mortgage insurance products in the calculation and increased monthly payment. FHA requires an upfront mortgage insurance premium which is typically 1.75% of your loan amount. This amount is due at closing; many first-time homebuyers roll this amount into their loan.
Our team is available to discuss a variety of product and mortgage program options. The Premia Relocation Mortgage team uses several mortgage insurance providers with various calculations to find the type of mortgage insurance that best fits your financial goals.
*Premia Mortgage, LLC dba Premia Relocation Mortgage is an FHA Approved Lending Institution and is not acting on behalf of or at the direction of HUD/FHA or the Federal government.
Jun 07, 2021