How To Make MI Work For You
All too often I hear misconceptions about the purpose and overall necessity of mortgage insurance. I hope to provide clarity and understanding while illustrating some potential benefits of accepting a loan with MI. Without question, we’d all love to see a lower payment but for many MI creates the opportunity for homeownership. For others, mortgage insurance gives flexibility to the borrower allowing them to keep more of their available cash post-closing.
Mortgage insurance does not protect the borrower, but rather the lender from loan failures, defaults, and foreclosures. The premium is paid by the borrower. Let's take a closer look.
Quick Facts About MI
Fact 1: Borrower Paid Mortgage Insurance (BPMI) is paid monthly with the total payment. The required Private Mortgage Insurance (PMI) stays on the loan until the balance reaches 78% loan-to-value based on the lower of the original purchase price or appraised value. By meeting certain criteria, a borrower can request to remove their MI at 80% LTV.
Fact 2: For certain qualifying borrowers, there can be a reduction in Private Mortgage Insurance (PMI) rates with some conforming loan programs. Together we can determine if this applies to your scenario during the pre-qualification process.
Fact 3: Borrowers with higher credit scores may benefit from Lender Paid Mortgage Insurance (LPMI). In this scenario, the MI is built into the note rate rather than paid monthly with the payment often leading to a lower total payment.
Fact 4: Currently, FHA loans with down payments of 10% or less carry a Mortgage Insurance Premium (MIP) paid with the total payment for the life of the loan. All FHA loans also require an Up-Front Mortgage Insurance Premium (UFMIP) to be paid through closing.
When a borrower obtains a conforming loan with a loan-to-value 80% or greater, mortgage insurance will be required by the lender. Below you’ll see three primary ways to meet the MI requirement:
Borrower Paid Mortgage Insurance (BPMI)
Mortgage insurance is factored as a percentage of the loan amount and paid monthly with the mortgage payment.
PRO: The mortgage insurance will automatically cancel at 78% LTV and can be requested off by the borrower at 80% LTV. In general, the higher the down payment, the more advantageous this option becomes.
CON: For higher credit score borrowers who put a minimum down, their monthly payment may be higher than the LPMI option.
Lender Paid Mortgage Insurance (LPMI)
Mortgage insurance is built into the interest rate, rather than paid monthly by the borrower.
PRO: For higher credit score borrowers the total monthly payment may be lower than if they accepted the BPMI option.
CON: The mortgage insurance is built into the note rate and therefore fixed for the entirety of the loan.
The mortgage insurance is paid up front through closing as a one-time fee.
PRO: The borrower receives a lower note rate than LPMI and never pays the monthly MI premium.
CON: A significant sum of available cash is used at closing to pay the premium.
When a borrower is considering a 30-year loan term, one must be sure to recognize the relationship between down payment and monthly payment. More funds used at closing may have a smaller impact on payment than you’d first imagine.
With interest rates remaining near historic lows, many borrowers contemplate whether available funds should be used to reduce the loan (and payment) versus other means such as investments, safety funds, home improvements, debt reduction, etc. Together we can create a strategy to help you maximize your available dollar.
Up-Front Mortgage Insurance Premium (UFMIP)
FHA loans require an Up-Front Mortgage Insurance Premium which is a contribution to the general insurance fund that supports the loan program. Currently, this UFMIP is currently 1.75% of the loan amount. In many cases, borrowers finance the fee into the total loan amount, but it can be paid in full at closing as well.
Annual Mortgage Insurance Premium (MIP)
The MIP required on FHA loans is a factor that varies based on the borrower’s down payment and loan term. When a borrower puts less than 10% down on the purchase, the MIP stays with the loan for the full term. With a 10% down payment (or more), the required MIP is eliminated after 11 years of payments.
A borrower’s credit score plays an important role in determining the best loan option. With conforming loans, the PMI factor varies based on loan-to-value and credit score. Generally speaking, as down payment decreases as well as credit scores, PMI premiums will increase. With FHA loans, the MIP stays the same regardless of the credit score.
We will discuss your short and long-term goals with the property (and loan) when deciding which loan option and corresponding MI option may be best suited for you.