Mortgage insurance: Do I need it? What is PMI? Do FHA loans have PMI?

The idea behind mortgage insurance is relatively simple: an insurance entity agrees to insure against default on a loan in exchange for premium payments.

The insuring entity may be a “private” mortgage insurance company or a government entity, but the company that issues mortgage insurance is not a lender.

Conventional loans use Private Mortgage Insurance – also known as PMI

When you buy a property using conventional financing, you will be required to put down a 20% down payment or purchase private mortgage insurance. When you have mortgage insurance on conventional loans, you can usually get your lender to drop your private mortgage insurance once you reach a 20% equity point in your property – and conventional loans allow for property appreciation when making the calculation.

If you think that you have 20% equity in your property and want to stop paying monthly private mortgage insurance, the first step is to contact your lender. Each lender has different procedures in place, but normally you can expect to get an appraisal done on the property and have some kind of form to fill out and submit to the lender. Specific questions about the process should be directed to your current lender because each lender is slightly different in their requirements for dropping PMI.

Lender Paid Mortgage Insurance

For conventional loans, there is also something called LPMI – which is short for Lender Paid Mortgage Insurance. The way that Lender Paid Mortgage Insurance works is that the lender agrees to pay the Private Mortgage Insurance in exchange for a slightly higher interest rate. LPMI programs were very popular a couple of years ago, now they are fairly rare to find.

FHA loans use Mortgage Insurance underwritten by the Federal Housing Administration

The way that mortgage insurance works for Arizona FHA loans is really in two parts: 1. Up Front Mortgage Insurance Premium (also known as UFMIP) and then Monthly Mortgage Insurance (also known as MMI or MI). Up front mortgage insurance premium is usually 1.5% – 3% of your loan amount (depending on which FHA program you are participating in) and is required to be paid up front, although it can be financed into the loan. The Up front mortgage insurance premium is amortized over a period of 5 years and should you refinance into a new FHA program during those 5 years, FHA will allow you to use whatever is left in your UFMIP account as a credit towards setting up a new loan.

FHA monthly mortgage insurance is figured at a factor of .55% of your loan amount paid monthly. So for a $100,000 FHA loan, the annual monthly mortgage insurance due would be $550 and it would be paid monthly – or about $46 per month. FHA monthly mortgage insurance must be paid until you have paid down the loan to 80% of what was originally borrowed – it does not factor in property appreciation at all. So if you borrowed $100,000 originally, you would be required to pay monthly mortgage insurance until you reached a loan amount of $80,000.

Popular Loan Programs That Don’t Require Mortgage Insurance

Not all loan programs require mortgage insurance – some of the popular loan programs that do not require any mortgage insurance include:

Is mortgage insurance a bad thing? Not necessarily. By purchasing mortgage insurance, buyers can become homeowners with increased buying power – a great benefit. First-time buyers can use a low down payment to help them afford their first home, or to purchase a more expensive home sooner. Repeat home buyers can put less money down and gain significant tax advantages because they will have more deductible interest to claim. Another option is going to https://www.purplepayday.loan/ for example, they can also use the cash they would have used for a large down payment for investments, moving costs or other expenses.

Justin McHood is a nationally published mortgage expert who lives and works right here in Arizona. You will normally find him wearing a blue starched shirt (he says that it goes well with is orange hair) and you can learn more about him at ArizonaMortgageTeam.com

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Comments

  1. Hi Justin,

    Can I get more clarity on this please?

    “FHA monthly mortgage insurance must be paid until you have paid down the loan to 80% of what was originally borrowed – it does not factor in property appreciation at all. So if you borrowed $100,000 originally, you would be required to pay monthly mortgage insurance until you reached a loan amount of $80,000.”

    I am in the process of buying a short sale in northern virgina. It will be my main residence. I am getting an FHA loan and putting about 5% down. The loan amount will be 195k. I hoping to rid myself of PMI in the future through appreciation but it sounds like that is not the case? Based on 195k, does that mean that the loan must be paid down to 156k (195k x .8) before PMI can go? What if the value of homes in my neighborhood come back some and are selling for 250k? 300k? Two years ago everything in this neighborhood was going for 400k. I don’t expect it to come back full force, but I would think values could rise 20% over time. I can’t pay for an appriasal to prove value? I was hoping that an appraisal of around 235K (195 x 1.2) in the future would make the bleeding stop. If this is true, can you point me to the rule? I assume this is coming from FHA? Comps don’t prove reasonable value? Is this there way of helping out new homebuyers?

    I’m guessing that paying off 40k could take the better part of a decade while appreciating 40k could take as little as a year- I think we’re near the bottom! :)

    Do you know the process of making PMI go away after the 80% value has been reached? Just a few phone calls to verify current loan value vs. original loan value?

    I have a mortgage broker I’m using. Who do I owe? Is my broker’s company making the loan? Or am I borrowing from the government? Or is the government just backing up this risky (only 5% down) loan for the mortgage company?

    Can the loan be refinanced after some appreciation? Not sure how rates will be in the future of course. Probably not worth another round of closing costs.

    Maybe I’ll start thinking about weighing $90/month in PMI against a possible credit card balance transfer assuming this transaction goes forward (still in a bank “holding pattern” of course). American Express was nice enough to finance 20k for me in the past at 0.99% for the life of the loan Let’s hope they bring those back at some point! :)

    Wish I could scrap up more down money. Thanks in advance for any deeper insights you may have,

    Marc

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