Understanding Insurance Premium on Mortgage

When you purchase a home, one of the important expenses that you might encounter is mortgage insurance. It is a type of insurance that protects the lender in case you default on your loan. This article will explain what mortgage insurance is all about and how it affects your loan payments.

What is Mortgage Insurance?

Mortgage insurance is a type of financial protection that lenders require to minimize their risk associated with lending money for a home purchase. It is designed to protect the lender’s investment if you default on your loan payments. In other words, it is not designed to protect you as the borrower, but rather to protect the lender’s interest.

There are two basic types of mortgage insurance:

• Private Mortgage Insurance (PMI)
• Mortgage Insurance Premium (MIP)

Private Mortgage Insurance (PMI)

PMI is required for conventional loans that do not have a down payment of at least 20% of the purchase price. Conventional loans are those that are not backed by the government like FHA loans.

The cost of PMI can vary depending on the loan amount and the borrower’s credit score. Typically, PMI costs between 0.3% and 1.5% of the original loan amount per year. The cost can be added to your monthly mortgage payment or paid as a lump sum at closing.

Mortgage Insurance Premium (MIP)

MIP is a type of mortgage insurance that is required for borrowers who have an FHA loan. It is paid by the borrower to the Federal Housing Administration (FHA) to protect the lender’s investment. MIP is generally required for the life of the loan, unlike PMI that can be canceled once the borrower has built up enough equity in the home.

The cost of MIP can vary depending on the loan amount and the term of the loan. It ranges from 0.45% to 1.05% of the loan amount per year, and it can also be added to your monthly mortgage payment or paid as a lump sum at closing.

How does Mortgage Insurance Affect Your Loan Payments?

Mortgage insurance is an additional expense that you need to factor in when calculating your loan payments. The cost of mortgage insurance can add hundreds of dollars to your monthly mortgage payment, depending on the loan amount, the term, and the type of mortgage insurance you have.

For example, suppose you have a $200,000 30-year mortgage with a 3.5% down payment and an interest rate of 3%. In that case, your monthly mortgage payment would be $898.23 without mortgage insurance. But if you have to pay PMI at a rate of 0.5%, your monthly payment would increase to $966.28, which is an additional $68.05 per month.

Similarly, if you have an FHA loan, you have to pay MIP, which can add $200 or more to your monthly mortgage payment, depending on the loan amount and the term.

FAQ (Frequently Asked Questions)

Can Mortgage Insurance Be Cancelled?

Private Mortgage Insurance (PMI) can be cancelled once you have paid down your loan balance to 80% of the original purchase price or the appraised value of the home, whichever is less. You can request your lender to cancel PMI, but they may require an appraisal or other documentation to verify the home’s value.

Mortgage Insurance Premium (MIP) is generally required for the life of the loan for FHA loans that were originated after June 3, 2013. However, if you have an FHA loan that was originated before that date, you may be able to cancel MIP after you have paid down your loan balance to 78% of the original purchase price or appraised value of the home, whichever is less.

Can I Avoid Mortgage Insurance?

Yes, you can avoid mortgage insurance by making a down payment of at least 20% of the home’s purchase price. If you cannot afford a 20% down payment, you may consider other options like an FHA loan or a conventional loan with a lower down payment requirement. However, keep in mind that these options may have higher interest rates and other fees.

Is Mortgage Insurance Tax Deductible?

Yes, mortgage insurance may be tax-deductible if you meet certain criteria. PMI may be deductible if you meet income limits and other requirements set by the IRS. MIP is also tax-deductible if you have an FHA loan for a home that serves as your primary residence.

Conclusion

Mortgage insurance is an important part of the home buying process that you need to consider when calculating your loan payments. It is designed to protect the lender’s investment if you default on your loan payments. There are two basic types of mortgage insurance: Private Mortgage Insurance (PMI) and Mortgage Insurance Premium (MIP). The cost of mortgage insurance can add hundreds of dollars to your monthly mortgage payment, depending on the loan amount, the term, and the type of mortgage insurance you have. Remember to do your research and compare different loan options before making a decision.