Private mortgage insurance or also known as PMI is an insurance policy used in conjunction with conventional loans and they protect lenders from the possible risk of default and foreclosure. Buyers who cannot make a significant down payment or choose not to can obtain mortgage financing at affordable rates. If you purchase a new home and want to put down less than 20%, your lender will can minimize its risk by requiring that you buy insurance from a PMI company before they will sign off on the loan. The cost you pay for PMI varies but is typically 0.5 to 1% of the loan.
If you pay monthly for PMI meaning you as the borrower pay a premium payment monthly until your PMI is either canceled or terminated. Your PMI can be terminated after your balance has reached 75% of the original home value. You can put in a request to cancel your PMI once you have reached 25% of the home purchase price or appraised value. A couple other types of private mortgage insurances include, a lender paid PMI also known as an LPMI when the lender pays the PMI the cost is included in the mortgage interest rate. Another type of PMI is single premium PMI, this is when you would pay for the mortgage premium upfront in a giant lump sum, at either closing or financing it into the mortgage.
Mortgage Insurance Premium
Mortgage insurance premium also known as a MIP is an insurance policy used in conjunction with FHA loans. If your down payment is less than 20% of the purchase price the FHA will require either an upfront MIP at the time of closing or an annual MIP that would be calculated yearly and due to be paid in 12 installments. The rate for an annual MIP will depend on the length of your loan and the loan-to-value ratio. If your loan balance exceeds $600,500, you’ll most likely owe a higher percentage.
Some loans with the FHA include case numbers if your loan has a case number that was assigned before June 2013 the FHA will require that your MIP is paid in monthly payments for a consecutive 5 years before the MIP can be dropped. Your MIP can only be dropped if your loan term is either greater than 15 years or if your balance reaches 75% of the original purchase price of the home- which can be found in your mortgage documents. If your FHA loan was after June 2013 other rules will apply.