There are numerous factors to consider when obtaining a mortgage, but for most people, the most important consideration is their total monthly payment. One of the most confusing parts of a monthly payment, especially for first-time buyers, is mortgage insurance. Not to be confused with homeowner’s insurance, mortgage insurance is an insurance policy that compensates lenders for losses due to default by the borrower on the loan.
Whether or not an individual borrower needs mortgage insurance of any type is completely dependent on the terms and conditions of their loan. At California Mortgage Advisors, we understand how daunting the mortgage process can be. Our goal is to help clients understand all of their options so that they can make optimally informed decisions regarding mortgage insurance and borrowing in general.
Mortgage Insurance for a Conventional Loan
While every lender will have a slightly different criteria for what they consider a “conventional loan”, when it comes to mortgage insurance, guidelines are fairly consistent across the board. Essentially, if the borrower’s down payment is less than 20% of the total value of the home, they will be required to purchase mortgage insurance of some sort to secure the loan against default. However, there are several different types of mortgage insurance available based on borrower preference and current financial status.
Single Premium Mortgage Insurance
As the name implies, borrowers choosing single premium mortgage insurance will make a single lump sum payment when they purchase their home. This payment is usually due during closing, but some lenders offer the option to finance the cost of the payment into the mortgage.
Lender Paid Mortgage Insurance
In this type of insurance, the cost of the insurance is calculated by the lender into the interest rate of the loan for the life of the loan. The benefit of this type of mortgage insurance is that the borrower will end up paying less on a monthly basis at the cost of paying slightly more over the life of the loan. It is also impossible to cancel this type of insurance as it is permanently factored into the interest rate of the loan.
Borrower Paid Mortgage Insurance
Borrower Paid Mortgage Insurance is both the most common and easiest to understand type of mortgage insurance. The borrower makes a small monthly payment every month until they reach a 20% home equity threshold. At this point, they are eligible to request a cancellation of the policy. It is important to note that many lenders also require the mortgage be in good standing with a positive payment history to authorize the policy cancellation.
Factoring Mortgage Insurance
Mortgage insurance rates are determined by individual mortgage insurance providers using a combination of borrower credit history, down payment size, and total size of the loan. Borrowers are free to find the terms that best fit their individual needs, but mortgage insurance rates are a non-negotiable part of the process.
FHA Loans and Mortgage Insurance
FHA loans are different than conventional loans in a variety of ways. One of the more noticeable differences is the way in which many FHA loans operate in regards to mortgage insurance. For the most part, FHA loans include mortgage insurance premiums as a permanent part of the loan. Borrowers will be expected to pay mortgage insurance premiums on their FHA loan for the life of the loan. They may not request a cancellation, and the fees will not be automatically cancelled once they reach a certain home equity threshold.
Fortunately, once a borrower with an FHA loan reaches the 20% equity threshold, it should be a relatively simple matter to refinance into a conventional mortgage with terms similar to their original FHA loan.
Mortgage insurance is not the most complicated part of obtaining a home loan, but it is an important consideration. The best way for a borrower to determine the mortgage insurance that is best for them is to contact a CMA Mortgage Advisor today. Our Mortgage Advisors will carefully explain the various options and how they will impact each borrower on a personal level.