What Is Mortgage Insurance?

When you purchase a home, the traditional thing to do was to make a 20% down payment. With housing prices where they are, that is not a viable option for most people these days, but there are all sorts of mortgage options that allow people to get into a home for as little as 3% down.

Mortgage insurance was developed to assist in making home ownership possible and to protect the lender in case of a default on a loan. The two most common types of mortgage insurance are private mortgage insurance (PMI) and mortgage insurance premium (MIP).

What is PMI?

PMI is a required monthly fee if you do not make a 20% down payment. To understand how much your PMI might be per month, you'll need to talk to your lender. There are various ranged for PMI and different factors such as loan-to-value (LTV) ratio are taken into account. So, what will PMI cost you? Here's an example of a PMI range on a $300,000 home loan:

• .5% PMI = $1,500 per year or $125.00 per month
• 1% PMI = $3,000 per year or $250 per month

What is MIP?

MIP is another type of mortgage insurance that protects the lender and is used with Federal Housing Administration (FHA) loans. MIP is required with every FHA loan, even if you place more than a 20% down payment. Unlike PMI, you'll need to pay an upfront mortgage insurance premium of 1.75% of the loan amount at the time of closing and annual MIP, which is calculated every year and paid once a month. In turn, this increases the cash needed for closing costs. For example, with a $300,000 home loan, you’ll need to pay an upfront insurance premium of $5,250. Some lenders do offer PMI as an upfront payment instead of monthly payments over time.

Another important difference between PMI and MIP, is that you can eliminate your monthly premium once the equity in your home exceeds 20% with PMI. With MIP, you pay the insurance premium for at least 11 years. In areas where the housing market is growing quickly, or if your financial situation were to improve, PMI can eliminate the monthly insurance costs far quicker than MIP and save you more money.

How do I get rid of PMI?

According to U.S. Mortgage Insurers, people paying PMI will typically make monthly PMI payments for an average of 5.5 years. You’ll need to have 20% equity in your home to get rid of PMI. If you've been making regular payments, once you have equity that exceeds 20% of the original appraisal price, you can request to cancel PMI. You should always request a written copy of the cancellation for your records.

If the economy is doing great and housing values in your area are skyrocketing or you’ve increased the value of your home through renovations or additions, you can request to cancel PMI based on your home's current increased value. In either case, follow the rules of your lender and get a new appraisal that validates the current value of your home exceeds 20% of what you owe.

How do I get rid of MIP?

If you take out an FHA loan, with a down payment below 10%, you will not be able to cancel the annual mortgage insurance premium until the end of the loan's term or the first 30 years of the term — whichever comes first.

Another way to eliminate mortgage insurance — either PMI or MIP — is to refinance your mortgage completely. Of course, the same rules apply above in your new mortgage, and with a conventional loan you'll need at least 20% equity or down payment. Refinancing can be a great option if interest rates have dropped and if home values have increased. Lastly, you can always cancel mortgage insurance by paying off the loan.

To learn more about PMI and cost:

• Call 866-386-7254
• Visit the Mortgage Center