Different Types of Mortgage Insurance Explained

When a borrower puts down less than 20% of the home's purchase price, mortgage insurance becomes mandatory, as it safeguards lenders against losses if a borrower defaults on their mortgage loan. Private mortgage insurance (PMI) and mortgage insurance premiums (MIP) are two common types of mortgage insurance, each with its features and requirements.

Mortgage payments with insurance premiums can be higher for borrowers, but it allows them to obtain a mortgage with a smaller down payment.

This article will explain the different types of mortgage insurance available to help you understand which type may be right for you when buying a home or refinancing your mortgage.

Whether you're a first-time homebuyer or a seasoned homeowner, understanding mortgage insurance can help you make informed decisions about your mortgage loan and potentially save you money over the life of your loan.

Understanding Mortgage Insurance

Lender-paid and borrower-paid mortgage insurance are two types of insurance coverage that protect the lender if the borrower defaults on their mortgage loan. Borrowers who can't make a down payment of at least 20% are typically required to pay PMI or private mortgage insurance. This insurance ensures the lender gets paid if the borrower defaults. Homeowners can also pay lender-paid mortgage insurance, which allows them to avoid PMI payments but typically results in a higher interest rate on the mortgage loan.

Borrower-paid mortgage insurance (BPMI) is a type of mortgage insurance the borrower pays for. It is usually paid as part of the monthly mortgage payment or PMI, and the annual mortgage insurance premium is another type of BPMI payment.

Mortgage Insurance: Why do you need it?

Buying a home can be a significant investment, and most people need to pay for their home with a mortgage loan. However, lenders require PMI if the borrower puts down less than 20% of the home's value. Mortgage insurance works differently depending on the type of mortgage loan you have.

For example, FHA loans require mortgage insurance to be paid for the life of the loan, while conventional loans allow you to cancel PMI once you have enough equity in your home. PMI is an additional expense you'll pay as part of your monthly mortgage payment.

Different Types of Mortgage Insurance

Different types of PMI include private mortgage insurance, split-premium mortgage insurance, and lender-paid mortgage insurance. Private mortgage insurance is the most common type and is required by most mortgage lenders. Split-premium mortgage insurance is a type of PMI where the borrower pays an upfront fee and a lower monthly PMI rate. Lender-paid mortgage insurance is a type of PMI where the lender pays the insurance premium, but the borrower pays a higher interest rate.

Borrower-Paid Monthly Mortgage Insurance (BPMI)

Borrower-Paid Monthly Mortgage Insurance (BPMI) is a type of private mortgage insurance that the borrower pays for as part of their monthly mortgage payment. BPMI is usually required when the borrower puts down less than 20% of the home's value as a down payment.

The PMI payment can range from 0.3% to 1.5% of the loan amount per year and is typically included in the monthly mortgage payment. BPMI allows borrowers to qualify for a home loan with a lower down payment, but it is an additional expense that can increase the monthly payment. Once the borrower has enough equity in their home, they may be able to cancel BPMI and reduce their monthly income. The Borrower-Paid Monthly Mortgage Insurance is the most popular mortgage insurance plan.

Single-Premium Mortgage Insurance (SPMI)

Single-Premium Mortgage Insurance (SPMI) is a type of private mortgage insurance that the borrower pays for in a lump sum at closing. Unlike BPMI, SPMI is a one-time, upfront payment that can be paid in full at closing or rolled into the mortgage loan. SPMI may be a good option for borrowers with a larger down payment who want to avoid the monthly PMI expense. SPMI typically costs less than the total cost of BPMI over time, but it requires a larger upfront payment. If the borrower decides to refinance or sell their home before the end of the mortgage term, they may be able to get a refund for the unused portion of the SPMI premium. However, SPMI is not as common as BPMI and may not be available from all mortgage lenders.

Lender-Paid Mortgage Insurance

Lender-Paid Mortgage Insurance (LPMI) is a type of mortgage insurance where the lender pays the insurance premium in exchange for a higher interest rate on the mortgage loan. With LPMI, the borrower does not need to pay a separate PMI premium or include it in their monthly mortgage payment, and instead, the lender builds the insurance premium's cost into the loan's interest rate.

LPMI may be a good option for borrowers with a lower down payment but who want to avoid the monthly PMI expense. However, borrowers should consider the higher interest rate and its impact on their overall mortgage payment over the life of the loan.

LPMI may also be less beneficial for borrowers who plan to refinance or sell their homes shortly.

LPMI is unavailable from all mortgage lenders and may require a higher credit score and a larger down payment to qualify.

Split-Premium Mortgage Insurance

Split-Premium Mortgage Insurance (Split PMI) is a hybrid type of private mortgage insurance that combines the features of both BPMI and SPMI. Split PMI allows borrowers to pay a portion of the PMI premium as an upfront lump sum at closing and the remaining amount as a monthly payment included in the mortgage payment. The upfront fee can lower the total cost of PMI over time, and the monthly payment can make it more manageable for borrowers who want to avoid a higher interest rate or a larger upfront payment. Split PMI may be a good option for borrowers with a moderate down payment who want to balance the upfront and monthly costs of PMI. Split PMI may allow borrowers to cancel their monthly PMI payment sooner than with BPMI alone. However, Split PMI is not as expected as other types of PMI, and borrowers should check with their lender to see if it is available and makes sense for their specific financial situation.

Private Mortgage Insurance Benefits

Mortgage insurance is a policy designed to protect lenders from financial loss if borrowers default on their mortgage payments. Below are some of the benefits of Mortgage Insurance:
1. Enables home ownership for individuals who cannot afford a large down payment.
2. Provides lenders with risk protection and reduces the risk of default.
3. Allows borrowers with lower credit scores to qualify for financing.
4. May offer favorable interest rates for mortgage loans.
5. It Provides peace of mind for borrowers and their families, knowing that their mortgage will be paid off in the event of an unexpected tragedy, such as the loss of a breadwinner.
6. Some types of loans, such as FHA and VA, may be mandatory.
Overall, mortgage insurance is essential to mortgage lending and benefits lenders and borrowers.

Mortgage Insurance Pros and Cons

Pros:
- Allows borrowers with a smaller down payment or credit issues to obtain a mortgage
- Can potentially lower monthly mortgage payments
- Provides a safety net for lenders in case the borrower defaults on the loan
- Can be canceled once the borrower reaches 20% equity in the property
- Can be tax-deductible for some borrowers
Cons:
- Can add high costs to the mortgage over time
- Does not provide any benefit to the borrower, only the lender
- In the case of FHA loans, the mortgage insurance premium is required for the life of the loan
- May be difficult to cancel if the borrower does not reach 20% equity or if the property value does not appreciate
- Can limit the borrower's ability to refinance or sell the property if the value decreases and the equity is insufficient.

Getting Rid of PMI

Private Mortgage Insurance (PMI) is typically required by lenders when a borrower puts down less than 20% of the home's purchase price. PMI adds to the cost of the loan and can be a significant expense over the life of the loan. However, there are ways to get rid of PMI.

One way to eliminate PMI is to make a larger down payment. If a borrower puts down at least 20% of the home's purchase price, lenders typically do not require PMI, which can save the borrower a significant amount of money over the life of the loan.

Another way to get rid of PMI is to ask the lender to cancel it once the borrower has reached a certain amount of equity in their home. The Homeowners Protection Act (HPA) requires lenders to automatically cancel PMI once the borrower has paid the mortgage to 78% of the home's original value. However, borrowers can request PMI revoked once they reach 80% of the home's actual value.

Homeowners Protection Act (HPA)

The Homeowners Protection Act (HPA) is a federal law that was passed in 1998. It provides certain protections to homeowners who have private mortgage insurance (PMI) on their home loans. The HPA requires lenders to automatically terminate PMI when the homeowner reaches 78% loan-to-value (LTV) based on the original property value. The law also requires the lender to provide the homeowner with an annual statement that shows how much the borrower has paid in PMI and the right to request cancellation of PMI when the LTV ratio reaches 80%.

In addition to the automatic termination and the right to request cancellation, the HPA requires lenders to provide certain disclosures to borrowers at the time of closing and annually after that. These disclosures include a statement of the borrower's right to request cancellation, a description of the lender's criteria for cancellation, and information about the borrower's right to appeal a denial of cancellation.

The HPA also provides specific protections for homeowners with adjustable-rate mortgages (ARMs). If the interest rate on an ARM increases, causing the monthly mortgage payment to grow, the HPA requires the lender to give the borrower notice of the increase and the right to cancel the PMI.

Overall, the HPA is designed to protect homeowners from paying PMI for longer than necessary and to ensure they know their rights regarding PMI cancellation. Homeowners should be aware of their rights under the HPA and take action to cancel PMI when they are eligible to do so.

Frequently Asked Questions about Mortgage Insurance

What is mortgage insurance?
If the borrower fails on the loan, mortgage insurance protects the lender.
Why do I need mortgage insurance?
Lenders will ask you to pay mortgage insurance if you purchase a house without a 20% down payment, which safeguards them in the event of your loan default.
How does mortgage insurance work?
Different types of loans have different ways that mortgage insurance works. If you have an FHA loan, you will pay a mortgage insurance premium (MIP) up front and another one every month. Most people with a conventional loan pay a private mortgage insurance (PMI) premium every month.
How much does mortgage insurance cost? The cost of mortgage insurance varies depending on the loan type and the amount you borrow. PMI typically costs between 0.3% and 1.5% of the loan annually.
Is mortgage insurance the same as homeowners insurance? No, mortgage insurance and homeowners insurance are two different things. Homeowners insurance protects you if your home is damaged or destroyed, while mortgage insurance protects the lender if you default on your loan.

Conclusion

Mortgage insurance is needed to keep lenders from losing money if borrowers don't repay their loans. It is usually required when a borrower puts down less than 20% of the home's price.

Different types of mortgage insurance are available, such as borrower-paid mortgage insurance (BPMI), single-premium mortgage insurance (SPMI), lender-paid mortgage insurance (LPMI), and split-premium mortgage insurance. BPMI is the most common type of mortgage insurance and involves the borrower paying a monthly premium.

SPMI involves a one-time payment at closing and may be less expensive than BPMI over time. LPMI consists of the lender paying the insurance premium in exchange for a higher interest rate on the mortgage loan.

Split PMI is a hybrid type of private mortgage insurance that combines features of both BPMI and SPMI.

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