Mortgage insurance is a part of buying a home but it can all be a little confusing, which is why we have provided some easy to follow information for you.
Lender Paid Mortgage Insurance
Also called LPMI, this type of insurance is when the lender buys the mortgage insurance and then pays the premiums to the insurer. However, the lender increases the interest rate to pay the premiums. However, LPMI can also reduce settlement costs.
Private and Government Insurance
If your mortgage is backed by the government, that means the Federal Housing Administration or FHA, Department of Veterans Affairs or VA, or the Farmers Home Administration or FMHA is guaranteeing the loan. For an FHA loan, you would need a minimum of 3% down but single-family homes are generally limited in price from 86,000 to 170,000.
Anyone can apply for FHA insurance but two other types of government mortgage, guarantee programs are usually preferred. For FHA, you would have the option of obtaining a loan for both construction and existing homes in rural areas. However, this is a specialized program. For the VA program, you would have to be a past veteran or reservist. For conventional mortgages, these are not guaranteed by the government, even when private mortgage insurers are involved.
The focus of government and private insurance is to help people buy a home with less cash down but the programs vary. For private mortgage insurance, the buyer must have a minimum of 5% down but this can drop to 3% under special affordable housing programs specific to first time buyers.
You can purchase private mortgage insurance on a variety of home loans with no preset limit on the loan but again, there are differences in how this all plays out. The bottom line is that private mortgage insurance provides protection to the lender against financial loss should you stop making the monthly payments. Typically, lenders would usually ask for insurance on a low down payment mortgage loan less than 20%.
Finally, private mortgage insurance costs between $250 and $600 a year on a $100,000 mortgage loan. The primary problem is that sometimes, the lender never stops charging the PMI even though the equity in the home drops below 80% of the loan amount. At that time, the insurance would not be mandatory. Therefore, if you reach this point, you should talk to your lending company to have the PMI stopped, which will save you some money.