What Is Mortgage Insurance and how can it protect me? Mortgage insurance is an insurance coverage that compensates investors or lenders in mortgage-backed securities if there are losses as a result of the default of such a mortgage. Mortgage insurance is either private or public depending on the insurer. Private mortgage insurance is generally less expensive than public mortgage insurance, and can even be provided by most mortgage brokers.
The two types of mortgage insurance are: Private mortgage insurance (PMI) and Public mortgage insurance (PPI). Private mortgage insurance provides mortgage protection only to selected lenders and individuals. Public mortgage insurance on the other hand protects one entity or the entire mortgage market, but not individual borrowers. Public mortgage insurance usually has tax advantages and flexible terms, but is not as advantageous when it comes to protecting one's home equity. Public mortgage insurance has tax implications that Private mortgage insurance does not have. In addition, public mortgage insurance is required by the federal government and requires minimum distributions from National Mortgage Association (NFA) funds; while private mortgage insurance is not required by government policies.
Private mortgage insurance rates and coverages are based on many factors including the type of loan used, credit score of the borrower, and the risk level associated with that loan. For example, if the borrower made a high monthly payment and maintained a low debt-to-income ratio, then the lender would consider a loan to be safe and offer low initial mortgage insurance rates. However, if the same borrower made all his monthly payments and had a high debt-to-income ratio, then the lender might consider that loan to be risky and increase the mortgage rates. A good rule of thumb is that the initial mortgage insurance rates you will receive will not change unless you specifically ask for a rate change after your loan has reached its term.
What is Mortgage Insurance?
The mortgage lender is not likely to lower your mortgage insurance costs because doing so would affect his profit margin. To understand this better, consider this: if you borrow a thousand dollars at a ten percent interest rate, and you sell your home after just three years, your lender will have made a profit of twenty-five thousand dollars. But if you borrow the same thousand dollars at a fifteen percent interest rate, and if you maintain your existing level of debt, your lender will have made no gain at all. Therefore, in the end, mortgage lenders are likely to continue to charge their normal markup rates even if the borrowers no longer qualify for standard mortgage loans. And, if you are close to home buying eligibility, you could be paying significantly higher mortgage insurance costs if you decide to refinance or sell your home after just three years.
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There are two options available for borrowers who fall within the FHA/FMHA loan protection guidelines. One option is to switch your loan protection from a conventional mortgage to an FHA / FMHA loan. Another option is to refinance your existing FHA loan into an FHA / FMHA loan. Depending on your financial situation, either option may be the most appropriate course of action.
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Switching your loan protection to an FHA loan reduces the amount of money you will pay in monthly mortgage insurance premiums. If your credit score is above average and your new FHA loan is priced competitively, you can expect to pay significantly less in monthly mortgage insurance premiums. On the other hand, if you have excellent credit and you refinance your current conventional mortgage to get an FHA loan, your mortgage insurance rates will increase significantly. This is due to the additional risk inherent in lending to individuals with lower credit scores generally are more costly to insure. Therefore, your new mortgage insurance premium will likely be a bit more than you would pay if you maintained your current loan terms.
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Another way to avoid PMI is to request a private mortgage insurance quote from a different lender. Many borrowers mistakenly believe that all lenders require borrowers to have private mortgage insurance (pmi). However, this is not true. There are some lenders who do not require borrowers to have private mortgage insurance, but may offer a better price and terms in order to attract business.
When comparing the cost of private mortgage insurance versus federal housing loans, it is important to remember that federal housing loans typically offer better loan terms and interest rates than private mortgage insurance. One reason for this is that the federal government is presently experiencing an economic downturn. Since the national economy is still improving, many lenders are tightening up their loan guidelines in an effort to make sure that they are not left with too much debt on their hands. As a result, you may find that a private mortgage insurance quote from one lender may be considerably less expensive than a federal housing loan quote from the same lender. Keep this in mind when comparing your loan to that of a friend or family member who may have a better credit score and better home values.
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