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Mortgage Insurance, also known as mortgage guarantee, is an insurance policy which financially covers lenders or investors against losses due to the default of a mortgage loan. In short, you as borrower pay the cost of the mortgage insurance, but it covers the lender, not you.
Mortgage insurance is mandatory in certain cases. You will be required to buy and pay for it if you get an FHA or USDA mortgage. It is obligatory if you put down less than 20% on a conventional loan. In addition, in case the loan-to-value (LTV) is greater than 80% (or equivalently, the equity position is less than 20%), you will likely be required to carry mortgage guarantee. The higher the LTV ratio, the higher the risk profile of the mortgage.
VA mortgages require a “funding fee,” rather than mortgage insurance.
How to avoid mortgage insurance?
Avoiding mortgage insurance or the VA’s funding fee is easy if you have money and good credit score. To do so, you need to make a down payment that is equal to at least one-fifth of the purchase price of the home. In short, to avoid private mortgage insurance, you need to get a conventional mortgage and put at least 20% down toward a home.
For instance, if your new home costs $250,000, you need to put down at least $50,000 to avoid paying PMI.
Mortgage Insurance Interest Rates and Costs
There are about 5 types of private mortgage protections (PMI) available. But in general, Mortgage insurance interest rates typically range from 0.41% to 2.25%, and the rate you pay depend on your credit score, loan-to-value (LTV) ratio, debt-to-income (DTI) ratio, fixed or variable interest rate structure.
The rates may be paid in a single lump sum, annually, monthly, or in some combination of the two (split premiums). Most people pay PMI in 12 monthly installments as part of the mortgage payment.
In general, your mortgage insurance cost or premium will depend on these factors:
- your credit score
- type of premium plan you choose
- your loan term (usually 15 or 30 years)
- type of interest rate you have; fixed or adjustable
- the amount of insurance coverage required by the lender: it usually range from 6% to 35%
- amount of down payment or loan-to-value ratio (LTV) (a 5% down payment gives you a 95% LTV; 10% down makes your LTV 90%)
- Other additional risk factors, such as the loan being for a cash-out refinance, second home, jumbo mortgage, or investment property.
Types of Mortgage Insurance
There are different types of mortgage insurance and it can be either public or private depending upon the insurer. In general, there are 5 types of private mortgage insurance (PMI)
1. Borrower-Paid Mortgage Insurance (BPMI) – This is the most common type of PMI in today’s mortgage lending marketplace. It allows you to obtain a mortgage without having to provide 20% down payment, by covering the lender for the added risk of a high loan-to-value (LTV) mortgage. BPMI single premium options may be a good choice for you if you want to keep the monthly payment low.
There is a growing trend for BPMI to be used with the Fannie Mae 3% down payment program. In some cases, the Lender is giving the borrower a credit to cover the cost of BPMI.
2. Single-Premium Mortgage Insurance (SPMI) – also known as single-payment mortgage insurance, this policy requires you to pay mortgage insurance up front in a lump sum, either in full at closing or financed into the mortgage. when it is financed it is often called single-financed mortgage insurance.
Single-Premium Mortgage Insurance has many benefits among them your monthly payment is lower compared to BPMI and you do not have to worry about refinancing to get out of PMI or get your PMI canceled.
3. Lender-Paid Mortgage Insurance (LPMI)
As the name suggests, in this type of private mortgage insurance, the lender seemingly pays the insurance premium. But actually, you will actually pay for it in disguise in the form of a subtle higher interest rate over the life of the loan.
The disadvantage of LPMI is the fact you cannot cancel the LPMI even when your equity reaches 78% because the insurance is part of the mortgage. But you have the benefits of a potential lower monthly payment compared with making monthly PMI payments.
4. Split-Premium Mortgage Insurance (PMI)
Split-premium mortgage insurance is often considered as a hybrid of BPMI and SPMI. It allows you to divide or split the mortgage insurance into a single upfront premium payment and a lower monthly payment. This reduces your obligation to come up with as much money up front as in the case of SPMI.
Split premium mortgage insurance can be a good choice for you if you want to reduce the monthly premium in order to qualify for a larger loan amount.
5. Federal Home Loan Mortgage Protection (MIP)
This protection is used with FHA loan or FHA mortgages and down payments of 10% or less which cannot be removed without refinancing the home. This type of private mortgage insurance requires an upfront payment and monthly premiums which are usually added to the monthly mortgage payments. In addition, you must wait 11 years before the protection can be removed from the loan if you had a down payment of more than 10%.
Top Mortgage Insurance Companies
There are several mortgage insurance companies in the US. They provide protection to lenders which enable borrowers who cannot afford the 20% down payment to purchase a home that they may otherwise never qualify to buy.
Here are top 7 Mortgage insurance companies in the United states:
National Mortgage Insurance Corporation (National MI) – National MI was just named by Fortune’s List as the Best Workplaces in Financial Services & Insurance. It is a private mortgage insurance company based in the US which enables borrowers with low down payment to realize their homeownership goal while protecting lenders and investors against losses related to a borrower’s default.
Arch Capital Group Ltd. (Arch Capital or ACGL) – Arch Capital is a Bermuda-based public limited liability company which writes insurance, reinsurance and mortgage insurance on a worldwide basis, with a focus on specialty lines, the segment of the insurance industry where the more difficult and unusual risks are written.
Essent Guaranty – Essent offers a different types of mortgage insurance (MI) solutions for homebuyers depending on their needs. Read and compare each policy before you buy. Understand the basics of each can help you choose the solution that best fists your financial situation.
Genworth Financial – with the Genworth Financial mortgage insurance, you get affordable monthly payments, easier closing paperwork than a FHA loan, competitive rates and guidelines, and quick underwriting turn-around times.
MGIC Mortgage Insurance – inspired in 1957 by Max Karl, Mortgage Guaranty Insurance Corporation (MGIC) is the first private mortgage insurance company in the country. The Enterprise Lending Center facilitates lending in all forward and reverse mortgage channels and across all mortgage products, including home equity.
Old Republic International – this is one of the top international mortgage insurance companies. It covers all the 50 states, 3 US territories and all of Canada, and has 139 subsidiaries, and 27 insurance subsidiaries. Old Republic International provides different types of insurance coverage, including PMI mortgage insurance and title insurance.
Radian Guaranty, Inc. – Radian Group is a financial company with a suite of mortgage, risk management products, real estate, and title services. Among others, it provides private mortgage insurance to protect lenders from default-related losses, facilitate the sale of low down payment mortgages in the secondary market and enable homebuyers to purchase homes with down payments less than 20%.
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