Mortgage insurance is utilized to protect the lender and minimize the risk of the loan to the investor on the secondary market. There is mortgage insurance for government loans and there is mortgage insurance for conventional loans in MA.
Let’s examine the different types of mortgage insurance
PMI- This stands for Private Mortgage Insurance. This is a monthly, risk assessed fee that is utilized for mortgages that go over 80% of the value of the home.
Example: If the home is valued at $100,000 and the loan amount is $85,000 that means the loan is at 85% LTV (loan to value) and would require PMI.
IMPORTANT: The higher the LTV the higher the PMI rate. Also important to remember, if your credit score is too low or your debt to income ratio is too high the PMI rate will be higher or even worse, you may not qualify for PMI.
LPMI- This stands for Lender Paid Private Mortgage Insurance. You may have seen a lender advertise a mortgage program without PMI although the LTV is over 80%. How do they do this? They utilize LPMI. Instead of paying the monthly PMI fee, the PMI is rolled into the rate. This would give the MA homeowner a higher interest rate.
Example: A loan with a monthly PMI may have a rate of 4% but with LPMI it may be 4.875%
IMPORTANT: LPMI can be a great alternative for someone who doesn’t qualify for PMI either because of an elevated debt to income ratios or a less than perfect credit score.
MIP: This stands for Mortgage Insurance Premium. MIP is utilized on government loans particularly FHA insured products. MIP is charged both as an upfront fee and as a monthly fee. MIP is a little different than PMI, although it commonly lumped together as PMI by some lenders for explanation purposes.
MIP FACT: MIP is regulated by HUD and changes every 6 months or so. The MIP rate is determined by the date the FHA case # has been ordered.