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Why do I need mortgage insurance

by | May 7, 2018 | Uncategorized | 0 comments

The FHA (Federal Housing Association) did research in the late 50’s on mortgage default rate and concluded that homebuyers that put less than 20% down had a significantly higher default rate than people who had invested more than 20% down on their new homes. At this point, there was a decision to be made, on one hand lenders still had the option to lend to borrowers that didn’t have 20% down understanding the risk involved. On the other hand, if investors established a minimum down payment of 20% a significant amount of the population would be ineligible for a conventional mortgage.

In response to this predicament, a man by the name Max Karl founded a company called MGIC (Mortgage Guaranty Insurance Corporation – https://www.mgic.com/). Max realized there was a hole to be filled, by insuring qualified (conventional-conforming) borrowers on home loans above 80% LTV (Loan-To-Value). MGIC successfully provided the lenders a layer of security while lending to home buyers with less than a 20% down payment. Mortgage Insurance is now mandatory on loans above 80 percent and comforts the lender by protecting a portion of the investment while simultaneously allowing a person looking to finance their home with minimal down payment. Mortgage Insurance does not insure the borrower in the case of bankruptcy, disability, loss of income, or death it simply allows borrowers to secure financing with less than 20% down.

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There are two types of mortgage insurance. PMI (Private Mortgage Insurance) which applies to conventional financing, and MIP (Mortgage Insurance Premiums) applies to FHA loans.

There are three factors that determine the borrower’s monthly PMI premium. First is the type conventional loan product, and second is the borrower’s credit score. LTV is the final factor on determining the borrower’s monthly premium, the higher the LTV translates to more risk on the lender’s behalf and thus a higher premium. The borrower may request that PMI be removed when loan gets paid down to 80% LTV, with no 60-day late payments in the last 24 months and no 30-day late payments within the last 12 months of the borrower’s payment history. As long as the borrower is current on their mortgage, PMI is automatically removed when the balance is paid off down to 78% LTV.

There are two types of MIP, the first UPMIP (Up-Front Mortgage Insurance Premium) and AMIP (Annual Mortgage Insurance Premium). UFMIP is required on (non-streamlined) FHA loans at a rate of 1.75 percent and typically financed into the loan. AMIP is an additional insurance required for FHA borrowers, it is calculated by multiplying the base loan amount by the applicable AMIP premium. The rate on AMIP is determined by the lender based on Loan-To-Value, the annual premium is then divided by 12 and added to your monthly mortgage payment.

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