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Private Mortgage Insurance and Mortgage Insurance Premiums Explained
Posted by intodoorsblog — December 23, 2020
Being a novice in the Real Estate Business, are you thinking of buying your very first property? As a first-time buyer, you must be acquainted with all the essential terms of Real Estate, including Down Payment, Mortgage, Mortgage Insurance, etc. Down Payment is the money that you have to show to the lender while buying a house. The lender will not allow you a mortgage if the amount you can generate is less than twenty percent.
There might be several reasons that you’re unable to raise an adequate down payment. As a first-time buyer, you may be bogged down by financial obligations, making it challenging to find the funds. You could be repaying student loans or having a low credit score, categorizing you as a high-risk borrower, which means high-interest rates. All these and other factors can have an impact on your savings and subsequent ability to raise an adequate down payment.

Not Enough Down Payment?

Down Payment being an essential part of a Real Estate Deal acts as proof that you’re capable of repaying your home loan. Don’t have it up to the required amount? Don’t Worry. Both the lenders and the borrowers can get a way out even if the down payment is not up to twenty percent.
Two significant facilities are there to help lenders if the borrower is unable to raise a down payment of more than twenty percent. These are Private Mortgage Insurance (PMI) and Mortgage Insurance Premiums (MIP).

Mortgage Insurance

If you are taking a home loan for the first time, you may be familiar with the term mortgage insurance. The fact that there are PMI and MIP may be confusing, but they are, in fact, two different terms. For starters, both are used to offset the default risks when the home buyers have a low-down-payment of less than twenty percent of the total price. It’s also important to know that mortgage insurance doesn’t protect a home buyer. Instead, it helps the lending entity against the risk that the buyer will default on their loan, leading to possible foreclosure.


One of the main differences between the two is that PMI is applicable where there are conventional loans and offers protection to the investors who buy the debt as a mortgage-backed security.
While MIP applies to FHA state-backed loans, it helps the title holder in case the borrower is not able to meet the needs of the contract. It pays off the decided amount to either the lender or the heirs, as stated in the policy.
It is the responsibility of the buyer to settle for the two types of mortgage insurance, but when it comes to PMI, it’s passed to a third party.

Private Mortgage Insurance

This private party related policy is more resilient in terms of payment. It may either be paid wholly at the time of insurance, or it may be engrossed in your monthly mortgage payments. The amount that PMI loans may vary depending upon the portion of the loan you’re taking or the individual risk factor i.e., Loan to Loan Value Ratio (LTV). LTV measures how much equity the buyer has at the initial step of borrowing.
Their rates are in the range of 0.5% to 2% of the loaned amount. Mostly, when the LTV reaches 78%, the PMI is removed. If, however, it isn’t. The borrowers can request the removal when LTV gets 80%.

Mortgage Insurance Policy

MIP includes two primary repayment methods. It can either take a total amount at the time of closing of the deal i.e., UFMIP. Or it can be calculated yearly and be paid in the form of monthly installments.

How to Pay PMI?

Private Mortgage loans are either paid every month as an additional payment with your Mortgage bills. Or it can be paid off as a single large payment called single-premium mortgage insurance.
You can also pay in combination. Pay some of the amounts upfront and then add the remaining in your monthly dues.

Why Avoid PMI?

PMI is the policy of insurance that benefits only the lender and protects him from the foreclosure of the property. When you buy a house, your lender would want you to access a Private Mortgage Insurance company so that he isn’t the one facing the downfall when you run out of money.
Lucky for you that there are several ways in which you can avoid getting the PMI while buying the house of your dreams. These include:
  • Down Payment must be 20% — Make sure that the initial payment you have is 20% so that your LTV ratio by 80%. This will ensure that you don’t have to take up an insurance policy to meet the lender’s demands. You can easily calculate the LTV by comparing your loan value and the amount of the payment of the house. As long as the LTV doesn’t exceed 80%, you’re good to go, and you won’t have to take up PMI.
  • The Piggyback Mortgage — The concept of this mortgage is quite easy to understand. For instance, you are only able to pay 10% of the house. How will you pay the extra 90% without getting a PMI? Well, it’s effortless. Get a PMI on 80% of the amount and spend the rest of the 10% from another Mortgage facility. This is also sometimes called the 80/10/10 policy.
Piggyback mortgage may help you in dodging Private Mortgage Insurance, but it has its drawbacks. Such mortgages come with higher interest rates. That means you will have to pay more.

Insurance: Your Utility in Real Estate

As a first-time homebuyer, it isn’t uncommon to not be able to raise a down payment of twenty percent. But these two types of mortgage insurances have you covered if you use them effectively to buy the house of your dreams.
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About Author:
Anthony Haulcy

Award-Winning, Multi-Million Dollar Producing Real Estate Broker and Mentor to the Masses. 
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