Mortgage Insurance (MI) protects the lender against losses if a borrower defaults on their home loan. (i.e. MI makes sure the lender’s get their money if the homeowner goes into foreclosure). Mortgage Insurance, PMI, MIP, and Funding Fees are all the same (sort of). The layman uses them interchangeably; however, they are program specific. “Mortgage Insurance” (a.k.a. MI) is a generic term for all these different mortgage insurances. PMI is mortgage insurance for conventional loans. MIP is mortgage insurance for government loans (like FHA and USDA), and a Funding Fee is for VA home loans and some bond loans.
Mortgage Insurance isn’t always a bad thing. Mortgage Insurance is Tax Deductible for many people and it is possible to Remove the MI on conventional programs when enough equity is created from paying down the mortgage, improving the home, and/or realizing property appreciation. That said, there are cases where Split Financing makes more sense to avoid the MI all together.
Mortgage Insurance Costs
The amount of Mortgage Insurance paid depends on the program.
The cost of Conventional Mortgage Insurance is determined by a variety of factors. Some of the more influential factors include: loan purpose (ex: purchase vs. refinance), credit scores (ex: 720, 700, 680, etc.), loan term (ex: 30 year vs. 15 year), down payment (ex: 5%, 10%, 15% down), occupancy (ex: primary home vs. vacation home), etc.. Our Conventional Payment Calculator will calculate an estimated MI factor based on all your criteria.
The FHA Mortgage Insurance and USDA Mortgage Insurance factors are predetermined by the loan term (ex: 30 year vs. 15 year) and the down payment amount (ex: 3.5% vs. 5%, 10% down). Our FHA Payment Calculator and USDA Payment Calculator will calculate the MI for you automatically.
VA Home Loans don’t have monthly MI but they do have a VA Funding Fee that is similar to an up-front single paid MI feature. The benefit of the VA Funding Fees is that it can be rolled into the loan amount. Our VA Payment Calculator will automatically calculate your Funding Fee. (Note: the VA Funding Fee may be waived for some Vets).
Programs That Require Mortgage Insurance
Most folks typically assume that a 20% down payment avoids MI but this isn’t always the case. Different loan programs have different guidelines for mortgage insurance. Example: a 20% down payment on an FHA loan still requires MIP. Click on any of the programs below for details covering the MI requirements and payment methods. (Note: we did not list VA below as it does not have Mortgage Insurance).
Conventional loans (i.e. non-government loans) typically require PMI when the Loan to Value (LTV) is greater than 80%. Programs do exists that reduce or remove MI – such as second liens.
Types of Mortgage Insurance
There are primarily three types of MI for conventional loans and each on has different MI Factors. (Technically there is a fourth called Split Premium that requires up-front money at closing with reduced monthly MI but we’ll save that topic for another day).
Monthly MI (though technically called annual MI) is the most common type of Mortgage Insurance since it required the least amount of funds to close. Monthly MI is included in the borrower’s monthly mortgage payment and can ultimately be cancelled without refinancing. Monthly MI becomes a great option when someone expects to do major improvements to the home and increase its value. That increased value then accelerates the timeline for the MI Cancellation process.
Lender-Paid MI (LPMI) requires a higher interest rate which impacts the costs over the life of the loan. Unlike monthly MI that can an eventually be removed, the lender-paid MI is “paid” for by the higher rate thus impacts the borrowing cost over the life of loan. This is a good option for those in higher income brackets since MI Tax Deductable and/or for someone who doesn’t expect to be in the house for the long-term and wouldn’t have reached the point of having the monthly MI go away. Niche products on banks’ portfolios (like jumbo loans, doctor’s loans, etc.) often included lender-paid MI.
SINGLE-PAID PREMIUM MI
Single-Paid Premium MI is a great way to avoid having the MI as part of the monthly payment. A Single-paid premium is a one-time, lump sum payment of MI that is paid at closing to avoid the monthly MI. This is typically paid by the borrower with funds due at closing, however, this single-paid premium can also be: 1) paid by the seller via Seller Concessions, 2) paid by the lender via Premium Pricing or 3) rolled into the loan amount so long as the LTV doesn’t exceed 95%.
Single-Paid becomes a great option when there is a 10% equity position because the single-paid typically equates to 2.5 to 3 years worth of monthly MI payments. A 5% equity position can employ single-paid MI but it equates to about 4 to 4.5 years of monthly MI payments. At that point it’s typically more advantageous to put down an extra 5% and take the lowered monthly MI option. An advantage to the single-paid MI verses monthly MI is that the single-paid is not impacted by future fluctuations (i.e. reductions) in property values since the monthly MI Cancellation will be dependent upon the value. The obvious downfall to the single-paid is the additional Closing Cost due at closing.