When sifting through the intricacies of mortgages in Colorado Springs, it is easy to get caught up in the thick of mortgage terminology and complex variables that alter how a loan program will work for you. One of the variables you will likely encounter when shopping for a home loan is mortgage insurance. There are two main types of home insurance: Mortgage Insurance Premiums (MIP) and Private Mortgage Insurance (PMI). The goal of mortgage insurance is to help prospective homeowners with low down payments secure a loan while protecting the lender from the risk of default. When navigating the home loan programs that are right for your unique situation, it is important to note the key differences between PMI and MIP so that you can make the best financial decision for your future.
What Is Private Mortgage Insurance?
Private Mortgage Insurance (PMI) protects mortgage lenders from risks involved with conventional loans with low down payments. If you are a first time home buyer or in a situation where a down payment of less than 20% of the total home loan is your most feasible option, then PMI is required in order to secure the loan.
Depending on individual risk factors that apply to the borrower such as loan-to-value ratio, credit score, down payment, and loan total, the PMI rate will vary. On average, private mortgage insurance rates run between 0.5% to 2% of the total home loan amount.
Private mortgage insurance payments may be included within the monthly mortgage payments or paid in full at closing. PMI must be paid until the home’s equity reaches 80%, at which time the private mortgage insurance may be canceled as long as the home loan is current.
What Is Mortgage Insurance Premium?
Mortgage Insurance Premium (MIP) applies to all FHA loans. FHA loans typically have low down payments, so MIP is in place to protect lenders from the high risk. MIP has both an upfront premium cost and an annual premium that can be paid in monthly installments.
If the FHA loan requires MIP, then the upfront premium is 1.75% of the total loan followed by an annual premium. The upfront premium may be rolled into the home finance and paid monthly.
Typically MIP must be paid annually for 11 years when a down payment over 10% is executed. If the down payment on an FHA loan is less than 10% of the total loan, then MIP must be paid for the life of the loan. Refinancing is the best option to remove mortgage insurance since the risk is significantly reduced for lenders once refinancing requirements are met.
What Mortgage Insurance Do I Need?
Mortgage insurance acts as a safeguard for lenders which, in turn, provides prospective homeowners the opportunity to secure home loans with low down payments. Ultimately, the type of mortgage insurance is dependent on your specific needs and ability to qualify for a home loan. Ideally, a prospective homeowner can put down 20% of the total and avoid mortgage insurance altogether, but that is not always the case which is why mortgage insurance exists in the first place. Private mortgage insurance is much more flexible and may be removed without having to refinance your home, but an FHA loan with MIP might fit your situation better.
Mortgage Insurance Experts | The Reichert Mortgage Team
Navigating which home loan program is right for your situation in order to provide for your needs while protecting your financial investment can be difficult. The mortgage specialists at The Reichert Mortgage Team are well-versed in the depths of mortgage insurance. Connect with our approachable experts to discuss which home loan will work for you and how your specific qualifications will impact the mortgage insurance you may need.