Basics of Mortgage Insurance – An Ultimate Home Buyer’s Guide

Mortgage insurance, also known as PMI, is an integral part of your home buying plan. You will have to pay for it if you’re applying for an FHA mortgage or making a down payment of less than 20% on a conventional loan plan.

Conventional loans are not insured. That is why even the best mortgage lenders Dallas will ask you to pay for PMI or any other suitable private insurance, in case you don’t want to put at least 20% down on your plan.

Because many buyers find it hard to meet the traditional target of a 20% down payment, mortgage insurance will allow them to make payments in smaller installments. The goal of PMI is to protect the lender in case the buyer defaults on their loan. 

What is PMI?

Simply put, a PMI is a type of insurance that a buyer might be required to buy when they apply for a conventional loan plan. When you make a down payment of less than 20% of the total property value, the LTV ratio is greater than 80%. The higher LTV ratio indicates the higher risk profile of the mortgage for the lender. 

While the policy protects the lender’s investment, you can also benefit from it in several ways. For example, you can borrow money even if you’re not able to make a 20% downpayment in the beginning. This paves the way for many potential investors and homebuyers who don’t have ample savings to meet the minimum down payment requirements. 

But obviously, you have to keep monthly payments in mind. You have to pay your PMI until your lender no longer considers you high-risk. 

The PMI cost can range anywhere between 0.25% and 2%. But the actual payment depends on the type of mortgage and the size of the down payment. The more high-risk profile you have, the more you’ll have to pay. 

Types of PMI

As mentioned above, the goal of PMI is to protect the lender and not you. The failure to repay your monthly mortgage payments may affect your credit score and may result in foreclosures in extreme cases. 

Not all home loans are created alike. That is why a mortgage loan works differently depending on the type of loan you have selected for yourself. 

Here are some of the most common types of mortgage insurances your lender might offer you as options. 

BPMI

BPMI stands for borrower-paid mortgage insurance. It is the most common type of PMI that requires borrowers to pay an additional monthly fee that they have to pay with their loan payment.

You’ll have to pay BPMI until you hold at least 22% equity in your home. Your lender will cancel any further payments as long as you’re regular in making your mortgage payments. 

You can also request your lender to cancel BPMI when you have 20% equity in your home. The lender’s decision will depend on your satisfactory repayment history.

MIP

The next on our list is MIP, also known as Federal Home Loan Mortgage Protection (MIP).

This type of mortgage insurance is only used with certain types of home loans – loans that are guaranteed by the FHA. 

PMI through any type of FHA loans or FHA mortgages is called MIP. This type of mortgage insurance requires at least a 10% down payment and cannot be canceled without home refinancing. 

Besides that, MIP also requires an upfront payment/monthly payments. 

SPMI

SPMI stands for single-premium mortgage insurance. As its name hints, this mortgage insurance type requires you to pay your payments upfront in a lump sum. 

You can either pay the entire amount at the time of closing or get it financed  into the mortgage. 

One of the obvious benefits of SPMI is you don’t have to pay a lot of additional amounts with your monthly mortgage payments. Also, you don’t have to think about refinancing to get rid of your PMI. 

The only downside is you won’t be able to get back the single premium in case you plan to refinance or sell your house. 

LPMI

LPMI is another mortgage insurance type in which your lender is actually the one responsible for making the insurance premium. 

Don’t get confused. You will pay money over the life of your loan but in the form of a raised interest rate. 

Because the insurance is built into the loan, you can’t cancel it at any point like BPMI. 

Can You Avoid Mortgage Insurance?

You can search for first-time homebuyers programs online that come with low down payments. These programs land with reduced or no mortgage insurance requirements. However, they are offered by just a few states. 

But if you’re opting for a conventional loan, you’ll have to put at least 20% as a down payment to avoid mortgage insurance.