When you have a mortgage that exceeds 80% of the appraised value of the property you typically have to pay mortgage insurance on your loan. You may hear of mortgage insurance called Private Mortgage Insurance (PMI) or Mortgage Insurance Premium (MIP), but they are essentially the same thing.
There are varying levels of PMI coverage required for different loan programs. Some loan programs can cut your monthly PMI premiums drastically which means a lower total monthly mortgage payment for you. FHA, Fannie Mae and Freddie Mac have several different options for most buyers. Your mortgage professional can advise you of the many options that are available to today's homeowners.
If you take out an FHA loan you will have to pay an up-front mortgage insurance premium in addition to your monthly mortgage insurance. This up-front premium is 1.5% of the loan amount. If you sell your home within the first 7 years of the policy you will refund a partial refund of the initial premium you paid.
PMI is not tax deductible, but mortgage interest is. Ask your mortgage professional about TAMI or tax advantage mortgage insurance. You will pay a slightly higher interest rate, but will not have to pay a monthly mortgage insurance premium.
Mortgage insurance is often priced according to risk very much like the mortgage itself. Generally, someone with a 620 credit score will pay more for private mortgage insurance than someone with a 720 credit score. PMI directly effects your monthly payment and maximum loan amount so be sure to speak with your mortgage professional about the cost of your private mortgage insurance.
Mortgage Insurance (PMI) can raise your monthly mortgage obligation substantially. There are ways to avoid paying mortgage insurance such as putting at least 20% down, 80/20 program, subprime loans, or going with lender paid mortgage insurance. However, most of the programs come with higher interest rates to offset the risk. Borrowers should compare each program to see which will save them the most money in the long run.
The most difficult thing to weigh when you are deciding on whether or not to choose a loan with mortgage insurance are the loan options available to you. If you have a credit score below 650, you are greatly limited in the number of second lien options. In these instances, you might find it very beneficial to take mortgage insurance. Also, programs for lower to moderate income families such as FHA or My Community charge a much cheaper amount of mortgage insurance. In some cases, this might be a better choice. Again, speak with a mortgage professional.
One additional note about mortgage insurance: When your LTV reaches 80% or lower, you may petition to have your mortgage insurance removed as long as you have been paying your mortgage on time. Once your loan reaches 78% LTV, the lender is required to remove mortgage insurance except for certain niche programs that require MI for the life of the loan. So, if you have a highly appreciating property, you might find it wise to pay MI for a few years, get an appraisal and petition to have the MI removed if you have dropped below the 80% LTV.
In today's market with rising interest rates and unstable home values, it's not such a bad idea to get the PMI. Sometimes if the situation fits the box, they will pay your mortgage for up to six months.
In general it is best to avoid or cancel Mortgage Insurance or PMI in order to save money on your monthly payment. The Homeowners Protection Act of 1998 - which became effective in 1999 - establishes rules for automatic termination and borrower cancellation of Mortgage Insurance (PMI) on home mortgages. These protections apply to certain home mortgages signed on or after July 29, 1999 for the purchase, initial construction, or refinance of a single-family home. These protections do not apply to government-insured FHA or VA loans or to loans with lender-paid Mortgage Insurance (PMI).