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This video provides a basic overview of mortgage insurance, comparing Private Mortgage Insurance (PMI) for conventional loans and Mortgage Insurance Premiums (MIP) for FHA Loans.
This can be a confusing topic for first time home buyers or borrowers planning to pay less than 20% of the home value as their down payment. My goal is to make it simple!
So what is private mortgage insurance? / What is PMI?
Private mortgage insurance is a payment added on to your monthly mortgage payment when you have a conventional home loan with a down payment less than 20%. In lending terms, this is a loan with higher than 80% Loan-to-Value (LTV).
Any loans with higher than 80% LTV require the borrower to pay PMI insurance to insure the lender in case of default. In the case of PMI mortgage insurance, once the borrower pays back some of the loan and reaches 20-22% equity in the home (AKA 80% LTV), they can have the mortgage insurance payments removed from their monthly bill.
The amount a borrower must pay for mortgage insurance on conventional loans (PMI) is completely dependent on their credit and risk as a borrower. The lender/bank and insurance company work together to determine what the payment will be. Higher risk will mean a higher payment. To determine risk, they look at the borrower's financial situation, including their income, expenses, savings, credit score, and debt-to-income ratio.
What are mortgage insurance premiums? What is MIP?
Similar to PMI, mortgage insurance premiums (MIP) are payments to insure the lender in case of default, however this term is more commonly used insurance premiums of FHA loans.
The FHA loan program has significantly lower requirements for borrowers than conventional loans, allowing home buyers to pay as little as 3.5% for a down payment of a home.
See my video on FHA loans here: [ Ссылка ]
These MIP insurance premiums paid for FHA loans are calculated at a fixed rate instead of the borrowers financials. To calculate the payment, take 1.25% of the loans balance, spread over the life of the loan as a monthly payment. A buyer pays the MIP insurance premium payment over the entire life of the loan, however, they may refinance out of the FHA loan once they have enough equity in the property.
What's the difference between PMI and MIP?
- The main difference is that PMI mortgage insurance is for conventional loans and MIP mortgage insurance is for FHA loans. FHA is a loan with significantly lower requirements for the borrower.
- MIPs with FHA Loans are paid over the entire life of the loan, but PMI with conventional loans are only paid until the borrower reaches 20-22% equity in the home
- With PMI the payment amount is calculated based on the home buyer's financials. With MIP / FHA loans it's calculated using a fixed rate of the loan amount.
Seller Financing / Second Mortgage
Seller financing can be a useful tool for buying real estate with a low down payment but avoiding private mortgage insurance.
For example, with an 80/10/10 loan, a home buyer or real estate investor may purchase a property with 10% down, get conventional financial at 80% LTV (thus avoiding PMI), and negotiate a second mortgage with the seller for 10% of the home price.
Keep in mind that seller financing are second position loans, so they are higher risk for the lender. Because they are higher risk, they usually have higher interest rates. Also, the loan is payed back over a shorter period of time than a conventional mortgage.
#realestate #mortgageinsurance #homeloan
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DISCLAIMER: This video is provided for informational or entertainment purposes only. Check with your accountant, lawyer, and/or other professionals/advisors before relying on this information. Although we believe it to be reliable, we do not provide any warranties and we do we do not guarantee its accuracy or completeness. Please consult a professional and use common sense. common sense
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Music by Staso AKA Stanley Jeong:
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