Mortgage insurance comes with the territory when your down payment on a new home is less than 20 percent of the home’s total cost. This insurance partially protects the lender against financial loss if you fail to keep up with your mortgage payments. Generally, you’ll be expected to foot the bill for mortgage insurance yourself until you satisfy your lender’s minimum requirement. In some cases, the lender will pay for mortgage insurance itself — but the cost is ultimately passed back to you in the form of higher interest.
Mortgage Insurance Comparison
Although mortgage insurance protects the lender, not the borrower, it’s typical for the borrower to pay the mortgage insurance premiums. Private lenders and the Federal Housing Administration charge annual mortgage insurance premiums, payable monthly. FHA, Veterans Administration and USDA Rural Development loans charge up-front fees, known as up-front mortgage premiums, funding fees and guarantee fees, respectively, equal to a set percentage of the overall loan amount. With lender-paid mortgage insurance, however, the lender does not require the borrower to pay mortgage insurance premiums.
Loans with lender-paid mortgage insurance, known as LPMI, typically carry higher interest rates than other types of loans. While private mortgage insurance that you pay for has a set cost, ranging from 0.25 to 6 percent of the total amount of your home loan, you may not be aware how much additional interest your lender has added to your loan to offset its LPMI costs.
Lender-paid mortgage insurance is active for the entire duration of your loan. In contrast, federal law requires that your lender automatically cancel any mortgage insurance policy you are directly paying for once your loan principal dips under 78 percent of your home’s total value. This means you may continue to pay for mortgage insurance in the form of higher interest payments with LPMI than with PMI, or private mortgage insurance.
The only way to cancel lender-paid mortgage insurance, according to the Federal Reserve, is to refinance your loan. If you already have a loan with LPMI, carefully consider whether refinancing is in your best financial interest. Not only will you face new closing costs, but you’ll also have to pay for private mortgage insurance if you need to borrow 80 percent or more of your home’s worth.
- Federal Reserve Board: A Consumer’s Guide to Mortgage Settlement Costs
- Federal Citizen Information Center: Looking for the Best Mortgage
- IRS.gov: Premiums for Mortgage Insurance May Be Deductible
About the Author
Marina Martin is a business efficiency consultant based out of Seattle, helping low-tech businesses save time and money by adopting new technologies. In addition to consulting, she has a particular passion for creating how-to, educational and training materials.
Michelle Castle provides mortgage loans to all of North Texas and Southern Oklahoma. Call Michelle Castle at (903) 892-1998 if you are looking for a home loan in North Texas and Southern Oklahoma.