Nothing is for sure in life but being born and biting the dust. I know that sounds dramatic but hear me out. When it comes to a mortgage, you are bound by a contractual agreement between yourself and the lender. In case of default or any other type of event that causes a loss, lenders need assurance that there is a life wreath when you abort ship. Sounds intense, right? Well, it is because a number of things can happen in that type of situation – it won’t bode well for both sides. A mortgage insurance premium helps to take away a bit of the bite that goes with the bark.
Where did Mortgage Insurance Start?
While mortgage insurance started in the 1880s, it didn’t become such a big deal until The Great Depression hit. The housing market was flipped upside down and there needed to be some kind of way lenders get protection in case of defaults that were rampant. The advent of the Federal Housing Administration (FHA) and Veterans Administration (VA) came about, and the government imposed their own mortgage insurance to create some type of order in this rather volatile market. As a result, lenders were insured in case of foreclosures and defaults. Additionally, housing was more affordable and secure.
Mortgage Insurance Premiums Under FHA Loans
If you’ve been under a conventional loan, you’ll know that there are a lot of early implications that make it rather trying to proceed. You need a higher credit score and a higher down payment and closing costs can be quite high. Since most FHA loans can be acquired under a 10% down payment, this means you’ll pay a mortgage insurance premium for the duration of the mortgage. The first one you’ll pay for right at the bat is the upfront mortgage insurance premium which pretty is much paid at the closing of the house or rolled into the mortgage. The second premium is the annual premium which is actually paid monthly through your mortgage payments. If you have the money before closing, try to get a home by paying over a 10% down payment. That will lessen the amount of time you’ll pay mortgage insurance premiums because there’s enough equity in a worse case scenario where you have to default. The amount of equity can protect the lender by giving them some sort of collateral to work with when you cannot make payments.
Facts about Annual MIP
Before you begin to consider what to pay for your monthly added MIP, know that your LTV, size of loan, and loan duration all play a role into what you’ll pay. Here’s a quick example..let’s say the duration of your loan is over 15 years and the loan limit is less than or equal to $625,000. This means a couple of things:
If the LTV is less than or equal to 95 percent, annual premiums are .80%. If the LTV is above 95 percent, annual premiums are 85%.
Now, if the duration of the loan is greater than 15 years and higher than the $625,000, this is a different ball game.
If the LTV is less than or equal to 95 percent, annual premiums are 1.00%. If the LTV is above 95 percent, annual premiums are 1.05%.
As you can see, a slight variation in loan size and LTV can clearly affect the amount of annual you’ll pay.
Why Do Borrowers Opt for a Conventional Loan? <h2>
Although, there are high initial fees and a down payment to consider, more benefits will come about quicker. Instead of acquiring a federal loan and reaping benefits of lower initial costs, they can ultimately have a much lower mortgage term. Some lenders want potential homebuyers to pay a 20% down payment right off the bat. Once there’s more than 20% equity in the home; you can actually cancel your mortgage insurance premiums. Why? This is enough equity built into the home to assure lenders that you are not only responsible, but you have a significant amount of collateral in case of dire situations like defaulting your mortgage. Some homeowners would rather wait to buy a home and pay that substantial down payment than have to pay added monthly fees for 11 years or the duration of the mortgage term.
It’s in your best interest to consult a lender before you decide to buy. Take a look at your records and get the best course of action. Find out whether FHA or Conventional may be the best option for you regarding mortgage insurance premiums.