12 AugWhen is Mortgage Insurance Required?

When is Mortgage Insurance Required?

The three main mortgage types include Conventional, FHA and VA.  Each have their own types of mortgage insurance each with a different name but all do the same thing – protect the lender for a portion of the mortgage in the case you default (foreclose).

Conventional

Conventional loans normally only require mortgage insurance when the down payment is less than 20%. Conventional mortgage are insured by private mortgage insurance companies and therefore the term most commonly used for mortgage insurance on conventional loans is PMI or Private Mortgage Insurance.  Because the insurance is done by private companies there are several ways mortgage insurance can be paid:

• One time premium paid at closing
• One time premium paid by the lender (normally increase your mortgage interest rate to cover the cost)
• Monthly premiums

The rates for the mortgage insurance will vary depending on the down payment and the PMI company selected by your lender.  Generally the more down payment the less the mortgage insurance will cost.  The PMI companies each have their own rules and restrictions for the type of borrower and property they will issue mortgage insurance on.  Your mortgage lender will work to place your mortgage insurance with the right company for your situation.  Typically the rates between mortgage insurance companies are about the same so this should not be a huge area of concern for comparing or shopping around.  In the case you wanted to check out the rates for the mortgage insurance you can do so at a few mortgage insurance companies on their websites.  Here are a few:

• MGIC
• United Guaranty
• PMI – This is a name of a private mortgage insurance company

FHA

FHA will always require some form of mortgage insurance.  No matter how much you put down FHA will always require a payment of up-front mortgage insurance.  The amount of down payment and the term of the mortgage selected will dictate the amount of mortgage insurance required to pay monthly.

Up-Front Mortgage Insurance is commonly referred to by the acronym UFMIP.  At the time this is being written the amount of the UFMIP for FHA loans is 2.25% of the base loan amount (Base Loan Amount = Purchase Price – Down Payment).  Effective October 4, 2010 there will be a change to UFMIP reducing it from 2.25% to 1.00%.  UFMIP can be financed on FHA loans and typically is.  If your base loan amount was $200,000 and the UFMIP was 2.25% or $4,500 then the full loan amount payment would be based on would be $204,500.

Monthly Mortgage Insurance for FHA loansis commonly referred to as MIP and will vary based on the down payment and the term of the mortgage.  Here is a chart to help in figuring out the amount of the mortgage insurance (at the time this is being written):

To calculate the monthly mortgage insurance you take the balance of the mortgage and multiply by the factor above.  That is the amount of the annual premium.  Just divide the annual premium by 12 and you will arrive at the monthly MIP.  For example, a $200,000 with 3.5% down on a 30 year fixed mortgage would have a factor of .55% or $1,100.  To calculate the monthly premium divide $1,100 by 12 to arrive at $91.67/mo.

As mentioned previously, the mortgage insurance on FHA loans is changing.  At this time the exact amount of the monthly mortgage insurance has not been determined.  We will be sure to update LendingAHand.com when those figures are released by the Department of Housing and Urban Development (HUD).

VA

The benefit of VA financing is that VA does not require monthly mortgage insurance.  VA does, however, still have a one time insurance equivalent to FHA’s UFMIP.  VA calls this their Funding Fee.  The amount of the funding fee varies based on the borrower’s military background and whether they have used their VA benefits for a home purchase in the past.  Here is a chart which shows the amount of the VA funding fee for purchase loans:

When Can Mortgage Insurance Be Canceled?

The time frame depends on whether the loan is Conventional or FHA and, of course, VA does not have a point that mortgage insurance is cancelled since there is not a monthly mortgage insurance premium.  For details on when the mortgage insurance can be removed check out our post called Get Rid of My Mortgage Insurance.

About the Author | Scott & Marla Wynn

Scott & Marla Wynn are mortgage lenders with a focus on education. We believe an educated customer is our best customer. The mortgage industry has complicated the process of obtaining a mortgage so much that most customers believe the best way to select a mortgage lender is to inquire about rates and fees. Although rates and fees are an important part of the mortgage process, there are much more important areas to be concerned with. Lending A Hand was created to pass along our experience, knowledge and research to YOU to allow you to become a more educated mortgage customer. If you are planning a home purchase or refinance and live in the state of Colorado, we hope you select the Wynn Team as your mortgage lender!