Your Guide to Understanding Mortgage Insurance

When a home buyer takes out a new mortgage and has less than 20% down often times they will be required to provide mortgage insurance to the lender (exceptions exist when we’re able to provide “combination loans” which are fairly uncommon these days).

Mortgage Insurance (also known as “mi” or “pmi‘) is insurance which covers the lender against a portion of their losses should the loan they make result in payment delinquency or foreclosure.

There are various forms of mortgage insurance which home buyers should be aware of. Here is a brief explanation of each:

Borrower-paid mortgage insurance (BPMI)– This is the most common form of mortgage insurance. The insurance premiums for this form are paid for by the borrower on a monthly basis and varies depending on the loan amount, loan-to-value, and credit score of the borrower. With this form of mortgage insurance the borrower can often request that the mortgage insurance payment be removed from their monthly payment once they have established a 24-month clean payment record and can demonstrate that they have 20% equity in the property.  However, it’s important to note that the only legal requirement the lender has to eliminate the mortgage insurance is under the Homebuyers Protection Act which states that the lender is not required to eliminate the mortgage insurance until the loan balance is scheduled to reach 80% of the original purchase price based on the original amortization schedule.

Lender-paid mortgage insurance (LPMI or “No mi”)– With this form of mortgage insurance the borrower accepts a modestly higher interest rate in exchange for not having to make a monthly mortgage insurance payment. Often times these plans create the lowest possible monthly payment and can be most tax efficient. The drawback of LPMI is that the increase a borrower accepts to their interest rate is permanent so even when they have achieved 20% equity in their home their rate will remained at the higher level.

One-time or “upfront” mortgage insurance– With this form of mortgage insurance the borrower makes a one-time mortgage insurance payment at the outset of taking the loan and then does not have to make any additional mortgage insurance payments for the duration of the loan. This option works best for a home buyer who is seeking to create the lowest possible monthly payment and has enough money to cover the additional settlement charges (but not enough to put 20% down).

Split mortgage insurance– Split mortgage insurance combines aspects of the BPMI & the one-time mortgage insurance forms. With a split mortgage insurance structure the borrower pays an upfront or “one-time” mortgage insurance payment at closing & accepts a monthly BPMI payment as well. The most common form of this is with the FHA program. With a FHA loan the buyer finances an upfront mortgage insurance premium into the loan amount and makes a monthly mortgage insurance payment. These two amounts are less than if the borrower did the BPMI or one-time mortgage insurance exclusively.