As you’ve researched the home buying process, you may have heard the term private mortgage insurance (PMI) or mortgage insurance premium (MIP). Mortgage insurance is different from your homeowner’s insurance, which primarily protects you as the homeowner and your house. To understand who your mortgage insurer is, we must first break down what mortgage insurance is and how it applies to homeowners.
What Exactly is Mortgage Insurance?
Mortgage insurance is an insurance policy that covers lenders if the borrower fails to make their mortgage payments. Remember, mortgage lenders must evaluate the risk of the loan based on several factors, including debt-to-income ratio. Another factor that’s often considered with traditional loan types is a 20% down payment.
With mortgage insurance, that risk is reduced which allows lenders to offer loans to borrowers who may not have normally qualified. For example, there are mortgage programs where qualifying individuals can obtain a mortgage with a reduced or zero down payment. In that case, the borrower may also need mortgage insurance to negate the risk of those programs.
Two common types of mortgage insurance are:
Private Mortgage Insurance (PMI)
PMI is a type of insurance that conventional borrowers with lower down payments pay.
Mortgage Insurance Premium (MIP)
MIP is a type of insurance that borrowers pay if they have loans backed by the Federal Housing Administration (FHA).
How to Pay Mortgage Insurer
Borrowers will pay for their mortgage insurance either by paying the premiums upfront, monthly, or indirectly through higher interest or origination fees when the lender pays. The most common method for PMI payments is to pay monthly as part of their mortgage payment. In that case, you’d see a line item on your mortgage statement listed as PMI.
With PMI, you’ll pay monthly until you’ve reached at minimum 20% equity in your home. However, that amount can vary based on the loan product. For those with MIP, you’ll pay premiums for the life of the loan, unless you put a down payment of 10% or more on your home. In that case, you’ll have MIP payments for eleven years.
Can I Contact My Mortgage Insurer Directly?
Since most borrowers have either their entire premium or a portion of their premium rolled into their mortgage statement, chances are, you typically won’t speak to your mortgage insurer directly. Instead, your loan servicer processes those payments and sends them to your mortgage insurer. Remember, your loan servicer is the intermediary for many mortgage professionals after closing. Any questions you have about your mortgage insurance should be directed to your lender.
More About Loan Servicing: What does a loan servicer do?
Mortgage insurance comes with a unique set of pros and cons. With mortgage insurance, you can potentially qualify for a home loan with a reduced down payment, but you would have the additional cost of insurance premiums. Your mortgage lender is a great resource for understanding how your mortgage insurer can affect the monthly cost of your loan product.
Michigan Mortgage Lender, Julie Krumholz from Superior National Bank
Julie Krumholz has been helping homebuyers navigate the mortgage process for over 30 years and helps match them with the best program for their needs. Julie has several loan programs for various incomes and financial situations, including FHA loans and MSHDA loans. She’s experienced nearly every facet of the mortgage industry, from processing, closing, loan origination, underwriting, QC auditing, and even co-owning a mortgage brokerage firm. Julie uses her experience to streamline the mortgage process and provide the best homebuying experience possible!
