Your Guide to Understanding Mortgage Insurance

When a home buyer takes out a new mortgage and has less than 20% down often times they will be required to provide mortgage insurance to the lender (exceptions exist when we're able to provide "combination loans" which are fairly uncommon these days).

Mortgage Insurance (also known as "mi" or "pmi') is insurance which covers the lender against a portion of their losses should the loan they make result in payment delinquency or foreclosure.

There are various forms of mortgage insurance which home buyers should be aware of. Here is a brief explanation of each:

Borrower-paid mortgage insurance (BPMI)- This is the most common form of mortgage insurance. The insurance premiums for this form are paid for by the borrower on a monthly basis and varies depending on the loan amount, loan-to-value, and credit score of the borrower. With this form of mortgage insurance the borrower can request that the mortgage insurance payment be removed from their monthly payment once they have established a 24-month clean payment record and can demonstrate that they have 20% equity in the property.

Example of monthly BPMI payment for $100,000 loan on 95% financing*: $65

Lender-paid mortgage insurance (LPMI or "No mi")- With this form of mortgage insurance the borrower accepts a modestly higher interest rate in exchange for not having to make a monthly mortgage insurance payment. Often times these plans create the lowest possible monthly payment and can be most tax efficient. However, as of late, this form of mortgage insurance is getting more and more difficult to qualify for. The other limitation with LPMI is that the increase a borrower accepts to their interest rate can never be removed even when they have achieved 20% equity in their home.

Example of additional monthly interest expense associated with LPMI for $100,000 loan on 95% financing: $33

One-time or "upfront" mortgage insurance- With this form of mortgage insurance the borrower makes a one-time mortgage insurance payment at the outset of taking the loan and then does not have to make any additional mortgage insurance payments for the duration of the loan. This option works best for a home buyer who is seeking to create the lowest possible monthly payment and has plenty of equity for down payment and settlement charges.

Example of upfront mortgage insurance for a $100,000 loan on 95% financing: $3,050

Split mortgage insurance- Split mortgage insurance combines aspects of the BPMI & the one-time mortgage insurance forms. With a split mortgage insurance structure the borrower pays an upfront or "one-time" mortgage insurance payment at closing & accepts a monthly BPMI payment as well. The most common form of this is with the FHA program. With a FHA loan the buyer finances an upfront mortgage insurance premium into the loan amount and makes a monthly mortgage insurance payment. These two amounts are less than if the borrower did the BPMI or one-time mortgage insurance exclusively.

Example of most common FHA split mortgage insurance form on a $100,000 loan on 95% financing: $1,425 upfront + $39.58 per month.