As I was driving into the office today, I heard a national mortgage company advertising lender paid mortgage insurance, and I thought about how misleading the ad was to the public.
So, here is an overview of mortgage insurance.
What is mortgage insurance? Basically, mortgage insurance protects the lender if you default on your loan. It is not home owner's insurance in any way, and really offers the home owner no protection at all. For a conventional loan, it is not required if you are putting down 20%. For an FHA loan, the MI is always required. And, for conventional loans, it is actually Private Mortgage Insurance, which is why it is abbreviated as PMI. For FHA and USDA, it is just MI.
PMI and MI can vary in terms of cost due to the following factors: Loan type, Loan Amount, LTV, and credit score.
PMI can be removed after a minimum of two years if the loan to value hits 78%. That can happen from additional principle payments or appreciation. Either way, you will likely have to have an appraisal from the banks approved list of appraisers. In fact, they will most likely order the appraisal themselves. You will also have had to have on time payments for at least 24 months.
One hitch with FHA loans is that the MI cannot be removed.....ever. This is a recent change, that is often misunderstood.
So, what's with lender paid PMI? The lender makes the interest rate higher to pay for the PMI. It will usually result in a lower payment versus a payment with normal PMI. The hitch comes in that your rate will be locked in higher. So, if you were to keep the loan for the full 30 years, you would actually pay more than if you had PMI that could be removed.
The point is that the lender isn't paying it for you out of the goodness of their heart. You pay a higher rate. It may be worth it. You may be able to afford a larger, nicer, more expensive home with lender paid MI. But, just know going into it that there are pluses and minuses to this loan product.
If you have questions, don't hesitate to call me at 678-992-3817. If you have feedback, please leave it below!
And, as always, "Make the Wise Move".
David and Amanda Blanton
Make the Wise Move!