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 Overview
“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. 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..
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).
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.
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.
The costs of Mortgage Insurance (MI) varies from program to program and the government-backed programs (like FHA, VA, USDA, etc.) have predetermined MI factors that only vary based on the Loan to Value (LTV) and the loan term (i.e. 30 year vs. 15 year fixed). Conversely, the costs of MI for conventional loans (i.e. loans that aren’t government-backed) varies greatly depending on the loan program, the type of transaction, and the borrower’s overall credit profile.
Please visit those pages for more details or visit our page on Mortgage Insurance for an overview of MI, PMI, and MIP. Our Mortgage Calculators take into account these MI factors to produce accurate payment options for each program.
MI is not required on loans with at least a 20% equity position or when doing Split Financing (i.e. a first and second mortgage). Mortgage Insurance can be tax deductible but that is dependent on the household’s adjusted gross income. See our page on Mortgage Insurance Tax Deductions for more details.
It’s worth noting that MI Companies could have their own underwriting overlays which could result in additional underwriting requirements; however, in the vast majority of cases a loan that is approved by a lender is eligible for Mortgage Insurance. In absolute worst cases there may be very rare incidents where a loan is eligible for bank’s portfolio but the MI guidelines prevent the loan from closing. Again, this very rare but it is worth noting.
Because the MI costs for government-backed loans are predetermined and not credit based we will not be addressing those factors here. For conventional loans there are primarily four types of MI (monthly, single premium, lender-paid, split premiums) and for each type there are different pricing “tiers”. These “tiers” are determined by the down payment for purchase loan (or the equity amount for refinance loans). The costs of the mortgage insurance is reduced with every 5% increment of a Down Payment.
Example: the first tier of 5% down has the most expensive MI, 10% down has less expensive MI, 15% down is the least expensive, and 20% or more down doesn’t require any Mortgage Mortgage. Note: technically there is a 3% down payment option for time-time buyers and it has the most expensive MI.
Conventional MI Factors
In addition to the down payment the amount of MI charged is based off of a variety of other factors. Check out our Mortgage Calculators that automatically factors these items in the payment calculations. Below are the criteria that influence the MI rate, ranked from the most influential to the least influential:
Loan Period: the MI rate is lower for loans with a 15 year period or less. For loans greater than 15 years (like a 20, 25, or 30 year mortgage) the MI rate is increased.
Loan to Value: the MI rate is reduced for every 5% equity increment. For this reason we typically recommend down payments of 5%, 10%, 15%, or 20% (or more). For example: the MI rate will be the same for a 5% down payment as it would be for a 9% down payment.
Credit Scores: MI rates are impacted by the borrower’s credit scores. The better the score, the lower the rate.
Miscellaneous: there are other factors that impact the MI rate, however they are minor compared to the aforementioned items. Examples of other factors include the occupancy type (i.e. primary residence verses second home), transaction type (i.e. purchase vs. refinance vs. cash out), loan amount (conforming verses jumbo), etc..
Types of Mortgage Insurance
There are primarily three types of MI for conventional loans. Technically there is a fourth called Split Premium but we’ll save that topic for another day. These are currently listed in order from the most commonly used to the least commonly used. As always, call us if you have any questions.
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.
Monthly 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 removal process. See our MI Cancellation page for more details.
Lender-Paid MI is rarely used because it 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 permanent and will increase the cost over the life of loan due to the higher interest rate. Lender-paid MI means that the lender can either pay the MI premium directly to the MI Company or self-insure the loan. Niche products on banks’ portfolios (like jumbo loans, doctor’s loans, etc.) often included lender-paid MI.
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 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: paid by the seller via Seller Concessions, paid by the lender via a Lender Credit, or 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 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 cost due at closing.
What are the Pros Mortgage Insurance?
- Avoiding high interest rates of a second mortgage
- You are not stuck with MI for the life of the loan, once your loan-to-value reaches below 80%, you can refinance and remove the MI
- Less money down
What are the Cons of Mortgage Insurance?
- The cost of Mortgage Insurance varies and is expressed in terms of the total loan value depending on the loan term, loan type, coverage amount and frequency of payments
- Higher payment with either MI or a second mortgage as a result of putting less than 20% down
Mortgage Insurance FAQs
What is Mortgage Insurance?
Mortgage Insurance (MI) protects the lender if your unable to pay the mortgage payment and guarantees your lender will get paid if you default. When financing a home you have choices, pay 20% or more down, get a second mortgage or get MI (Mortgage Insurance). If you don’t have 20% to put down, MI gives you the best options for financing. Mortgage Insurance should not be confused with Home Owners Insurance.
Do I need Mortgage Insurance?
It depends. You may need Mortgage Insurance on certain types of mortgages such as FHA. On Conventional and Jumbo loans, MI is required if you put less than 20% down.
Can I get rid of Mortgage Insurance at some point?
Yes you can get rid of Mortgage Insurance! Depending on the type of loan you have, the MI may fall off or you can refinance to eliminate it.
Do all loans require Mortgage Insurance?
No not all loans require mortgage insurance. Again, it depends on the type of loan you have. FHA does require MI no matter what. VA does NOT have Mortgage Insurance and Conventional/Jumbo loans do require under certain circumstances.
What is the cost of Mortgage Insurance?
The cost of mortgage insurance varies. Some of the variables that determine the cost are credit score, loan amount, loan type, how long the loan is financed for and loan-to-value. There may be more variables depending on the loan type.
Is Mortgage Insurance tax deductible?
The answer is yes, mortgage insurance could be tax deductible. You should always consult a tax adviser to see if your mortgage insurance is tax deductible.
Do I need to Qualify for Mortgage Insurance?
If you have been approved for a mortgage loan then you are qualified for mortgage insurance.
Loan Officer, NMLS # 729612