What Are the Different Types of Mortgage Insurance?

Nice suburban house The four private mortgage insurance (PMI) payment options available to both homeowners and prospective home buyers will be discussed in this article.

They frequently do not know the range of options available to them. We want to provide an in-depth analysis of the options available along with their benefits and drawbacks. We will also assist you in determining which mortgage option is best for your specific situation so that you can make an informed decision. Whether you're a seasoned homeowner or a first-time home buyer, this article will inform you of your options for paying PMI.

Borrower-Paid Monthly Mortgage Insurance (BPMI)

Borrower paid monthly PMI As the most common type of PMI, Borrower-Paid Mortgage Insurance (BPMI) requires the borrower to pay an additional monthly fee with their mortgage payment. The borrower continues to pay BPMI every month until they have 22% equity in their home (based on the original purchase price).

Once this equity is reached, the lender must automatically cancel BPMI, as long as the borrower is current on their mortgage payments.

Accumulating this amount of home equity can take about 15 years. The borrower can also request to cancel BPMI when they have 20% equity in their home. For this to happen, the mortgage payments must be current, the borrower must have a satisfactory payment history, and there must not be any additional liens on the property.

In some cases, the borrower may need a current appraisal to prove the home's value. Loan servicers may also allow borrowers to cancel PMI sooner based on home value appreciation.

For instance, if the borrower accumulates 25% equity due to appreciation in years two through five, or 20% equity after year five, the investor who purchased the loan may allow PMI cancellation after the home's increased value is proven. This can be done with an appraisal, a broker's price opinion (BPO), or an automated valuation model (AVM).

The borrower may also be able to get rid of PMI early by refinancing or prepaying the mortgage principal so that they have at least 20% equity.

However, it's important to weigh the cost of refinancing against the costs of continuing to pay mortgage insurance premiums. Additionally, it's worth considering if the borrower is willing to pay PMI for up to 15 years to buy now and what it will cost in the long run.

How to Calculate Borrower Paid PMI:

The PMI company determines the monthly PMI calculation based on the term (15, 20, 25, 30 years), loan to value (down payment), coverage (how much the PMI company pays the lender if the borrower defaults), credit score, and any necessary rate adjustments.

Example:
Loan amount = $100,000
Loan term 30 years
3% down payment (97% LTV)
Coverage is 35%
Credit score is 680 (680-699)
Factor 1.29%

Loan amount ($100,000) X 1.29% = $1,290.00 divided by 12 months equals $107.50/paid monthly.

As you can see, your monthly PMI payment is determined by your loan-to-value (LTV), credit score and term. Unique rate tables and additional rate adjustments affect the price of PMI for both fixed and non-fixed policies.

Borrower Paid Monthly PMI Cancelation

Borrowers can request cancellation of the mortgage insurance policy based on investor requirements or under the Homeowners Protection Act of 1998 (HPA). As per the HPA, Lenders must automatically cancel the policy.

Once the policy is canceled, the borrower's monthly mortgage payment will be reduced by the monthly premium amount. We provide refundable options with slight premium adjustments and prorated refunds. If coverage is canceled or terminated under the HPA, the unearned premiums will be refunded.

Single-Premium Mortgage Insurance (SPMI)

Single premium PMI As its name suggests, single-premium mortgage insurance (SPMI) is a type of private mortgage insurance (PMI) that is paid in a lump sum at the time of closing. This lump-sum payment can be financed into the loan amount or paid in cash.SPMI has several advantages over the more common monthly PMI payments.

First, it can save you money over the life of the loan if you plan on staying in your home for more than a few years.
Second, it may help you qualify for a lower interest rate because it lowers the loan-to-value ratio (LTV) of your loan. However, SPMI also has a few disadvantages.

Example:
Loan amount = $100,000
Loan term 30 years
3% down payment (97%)
Coverage is 35%
Credit score is 680 (680-699)
Factor 3.68%

Loan amount ($100,000) X 3.68% = $3,680.00

The single-premium mortgage insurance is paid with the closing costs or financed into the loan. Obviously, by financing the lump sum payment, the mortgage payment increases.

Example:
Loan amount = $100,000 + 3,680 = $103,680
Mortgage payment = 30 year term at 5% = $557.00

Keep in mind that the seller has the option to pay for the PMI premium, as long as the seller's concession falls within the lending guidelines. PMI companies offer the option of refundable and non-refundable PMI. When you decide to sell the home or refinance the mortgage, it is important to consider the option you choose, Remember that the refundable PMI is more costly.

Single Premium Borrower PMI Cancelation

At closing, borrowers can choose to pay the one-time, single payment or finance it into the loan amount. A third party, such as a builder or seller, can also choose to pay the one-time, single payment at closing.

Borrowers can request cancellation of the mortgage insurance policy based on investor requirements or under the Homeowners Protection Act of 1998 (HPA). Lenders must automatically cancel the policy under the terms of the HPA. If a policy is canceled based on HPA requirements, refunds for refundable and non-refundable single premiums will be based on our HPA refund schedules.

For refundable single premiums, if coverage is canceled during the first 5 years for reasons other than HPA requirements, we will provide a prorated refund. See refund schedules.

Lender-Paid Mortgage Insurance

Lender paid PMI As its name suggests, lender-paid mortgage insurance (LPMI) is mortgage insurance that is paid by the lender, rather than the borrower.

LPMI is sometimes referred to as “single premium” mortgage insurance because the premium is paid in a lump sum at closing, rather than being added to your monthly mortgage payment. Lender-paid mortgage insurance has its pros and cons.

On the plus side, you won’t have to worry about paying for mortgage insurance each month. On the downside, LPMI can be more expensive than borrower-paid mortgage insurance, and it’s not always easy to cancel. If you’re considering a lender-paid mortgage insurance plan, be sure to compare the costs and features of different plans before you make a decision.

Example:
Loan amount = $100,000
Loan term 30 years
3% down payment (97%)
Coverage is 35%
Credit score is 680 (680-699)
Factor 6.27%

Loan amount ($100,000) X 6.27% = $6,270.00

Example:
Loan amount = $100,000 + $6,270 = $106,270
Mortgage payment = 30 year term at 5% = $570.00

After calculating the cost of LPMI, the lender will raise the interest rate to account for PMI costs.

Split-Premium Mortgage Insurance

Split premium PMI Split-premium mortgage insurance is a type of PMI that allows the borrower to pay a portion of the premium up front, and the remainder over time. This can help to lower the monthly mortgage payment, and can be a good option for borrowers who are budget-conscious. There are a few things to keep in mind with split-premium mortgage insurance.

The borrower can choose an upfront fee ranging from 0.50% to 1.75% of the loan amount, with the option to pay it at closing or finance it into the loan amount. As the borrower chooses a higher upfront fee, the monthly fee decreases.

The example is based on a 1% upfront fee. The monthly fee calculation is the same as the borrower paid monthly cost.

First, the initial premium payment is usually higher than with other types of PMI.
Second, the borrower will still be responsible for the full premium if they sell or refinance before the end of the split-premium period.
Finally, it's important to compare quotes from multiple insurers before choosing a split-premium mortgage insurance plan.

Borrowers can request cancellation of the mortgage insurance policy based on investor requirements or under the Homeowners Protection Act of 1998 (HPA). Lenders must automatically cancel the policy under the terms of the HPA. Once the policy is canceled, the borrower's monthly mortgage payment will be reduced by the monthly premium amount. Split premiums are non-refundable unless coverage is canceled or terminated under the HPA, then the refund will be based on our HPA refund schedules.

Conclusion

In conclusion, selecting the right PMI plan for your mortgage is a critical part of the home buying process. By understanding and researching the different plans, you can make an educated decision on which plan best fits your needs and budget. When considering a PMI plan, it is important to compare and contrast the various options available to you. Additionally, be sure you understand all associated costs and fees with each plan before committing to one.

SOURCE:
Termination of Conventional Mortgage Insurance
MGIC rate cards
Mortgage Insurance Coverage Requirements