It’s no secret that purchasing a home, especially for the very first time, can feel overwhelming and intimidating. With all of the mortgage and real estate lingo, processes, and procedures involved, it’s no wonder buyers often find themselves confused and asking questions. Some of which regard mortgage insurance.
What is Mortgage Insurance
Mortgage insurance is a payment required of home buyers who have limited down payments of less than 20 percent for home loans. Mortgage insurance is designed to offset the borrower default risk for lenders and guarantee agencies that loan large amounts of money to borrowers with very little “skin in the game”. There are two types of mortgage insurance – PMI & MIP.
PMI & MIP
Although the concept of insurance protection is similar, there are distinct differences between private mortgage insurance (PMI) and FHA mortgage insurance premiums (MIP) that should be considered when deciding which loan program suits your financial needs.
PMI is private mortgage insurance that typically is available in a variety of premium plan structures and offers payment options that can usually be tailored to the borrower’s needs. There are a number of private mortgage insurance providers and each structure their offerings a bit differently.
MIP is the government-administered mortgage insurance program for the FHA. Since FHA loans offer reduced down payment options, MIP is required to offset the risk of a borrower defaulting.
Major Differences Between MIP & PMI
Major differences between these insurance programs include:
- No upfront mortgage premium required with PMI while an upfront MIP is required.
- PMI can be canceled after a stated LTV (loan-to-value) is achieved and favorable payment history has been established, while MIP is paid for the life of the loan regardless of LTV. In order to remove MIP, a borrower must refinance their FHA mortgage loan and meet minimum down payment and credit requirements.
Contact an Inlanta Mortgage loan professional to discuss your options and ensure that you select the program that is right for you! Click here to find a licensed mortgage loan professional near you or apply online today.