Purchasing a home, especially for the first time, can feel overwhelming and intimidating. With all of the mortgage and real estate lingo and the sometimes-overwhelming processes and procedures, it’s no wonder buyers often find themselves confused and with lots of questions. One of the most common ones we hear is, “What is mortgage insurance, and why do I need it?”
What is Mortgage Insurance
Mortgage insurance is typically required of home buyers when their down payments are less than 20 percent for their home loans. Note that mortgage insurance is designed to help protect lenders and guarantee agencies when borrowers don’t have enough equity in their homes and is not intended to protect the borrowers. 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 best suits your financial needs.
PMI, provided by private companies, is typically available in a variety of premium plans 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 borrowers defaulting on their loans.
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
- MIP is paid for the life of the loan regardless of LTV. In order to remove MIP, borrowers must refinance their FHA mortgage loans, 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.