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Mortgage 101 - Mortgage Insurance
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Mortgage Insurance
Mortgage insurance takes many forms. It should not be confused with
mortgage life insurance that pays the balance of the mortgage in the
event of the borrower's death, and it should not be confused with
homeowner or hazard insurance that pays for physical losses to the
property and contents. Mortgage insurance protects the lender against a
portion of a loss in the event of a defaulted loan.
Private Mortgage Insurance (PMI) and Mortgage Insurance (MI) are the
same and refer to the insurance of conventional loans. Mortgage
Insurance Premium (MIP) refers to the premium dollars for insuring an
FHA loan. The VA Funding Fee is a form of insurance (though technically
it’s a guarantee) for Veteran’s Administration guaranteed loans.
Conventional
Loans
Traditionally, borrowers made a 20% down payment when purchasing a
home. That down payment was enough to provide the lender with
sufficient equity in the event the borrowers defaulted on the loan. The
lender would foreclose and the loss would be minimized by that equity.
However, since many people were not able to make a 20% down payment,
lenders developed an alternate means of providing home ownership with a
lower down payment: mortgage insurance. The mortgage insurer protected
the lender against a portion of the loss in a defaulted mortgage,
thereby reducing the lender’s risk to an acceptable level. There are
several private mortgage insurers in the industry. Although the lender
usually coordinates the process of obtaining mortgage insurance, the
borrower may select the mortgage insurer if desired. Mortgage insurance
rates are regulated, however, so the lender's choice of an insurer
should not have any impact on the premium.
In most cases today, a 20% down payment negates the need for mortgage
insurance. Smaller down payments typically require increased (and more
expensive) mortgage insurance. However, there are many alternative
programs that eliminate the need for mortgage insurance, even with very
small down payments. These “No Mortgage Insurance” programs are usually
a financially superior decision. Give me a call for additional details.
FHA
Loans
The Federal Housing Administration provides loans to borrowers with
very low down payments. The concept is similar to conventional loans,
with a few exceptions. The insurance dollars are paid to the FHA. An
up-front premium is due at loan closing, and the premium may be
included in the loan amount. A monthly insurance payment is also
included in the loan payment. The amount of the up-front and monthly
premium varies with the term of the loan and the loan-to-value ratio.
Give me a call for specific details about a loan that interests
you.
VA
Loans
The Veteran’s Administration makes available loans to qualified
veterans with no down payment. A Funding Fee is paid at the time of
closing and the fee may be included in the loan amount. There is no
monthly insurance on a VA loan. The amount of the funding fee is set by
the Veteran’s Administration and varies from 0-3%. If you think you
qualify for a VA loan, contact Scott for additional information.
My mortgage
team
and I remain up-to-date with the various
mortgage rates, options, loan choices and alternatives and is an
invaluable resource for any home buyer or home owner who is considering
refinance.
We are committed to providing you with mortgage services
that exceed your expectations.
Feel free to
browse my decision-making
tools and calculators.
When you are ready
to discuss mortgage options give us a call. (916)
899-4839
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