Got Mortgage Insurance? You Have Options
Kevin GrahamDecember 24, 2019
As of July 6, 2020, Quicken Loans is no longer accepting USDA loan applications.
Mortgage insurance acts as protection for a lender or investor in a mortgage in the event that you default on your payments. Some form of mortgage insurance is required when you make a down payment of less than 20%. No one ever really likes having to pay an extra fee for mortgage insurance, but it does give you an advantage in that it enables you to make that lower down payment.
The good news is that if you have to have mortgage insurance on a conventional loan through Fannie Mae or Freddie Mac, you have some options available to you. With a lender-paid mortgage insurance (LPMI) option like PMI Advantage, you can even avoid a monthly mortgage insurance payment. We’ll go over the advantages and disadvantages of each option.
Borrower-Paid Mortgage Insurance (BPMI)
Borrower-paid mortgage insurance (BPMI) is what most people think of when they think mortgage insurance. It’s an additional fee added on to your monthly payment.
There are a few things you should know about borrower-paid mortgage insurance.
Your rate for BPMI is dependent on the amount of your down payment as well as your credit score. A higher down payment means a lower insurance coverage amount is required and leads to lower rates.
Additionally, once you reach 20% equity in your home, BPMI can be removed at your request, assuming you’re current on your loan. You’re not stuck with it forever.
Lender-Paid Mortgage Insurance (LPMI)
Lender-paid mortgage insurance (LPMI) could help lower your monthly payment and save you thousands over the life of your loan. In an LPMI loan option like PMI Advantage, your lender pays the full cost of your mortgage insurance policy upfront, eliminating the monthly fee.
In exchange, the cost of mortgage insurance is typically accounted for in one of two ways – or a combination of both.
The first method and the most common is to take the LPMI option in exchange for a slightly higher rate (compared to loans with traditional BPMI) on your mortgage itself. Every situation is different, but you often end up saving money because even with a slightly higher rate, your payment still works out to be less per month than payments on traditional loans with the added mortgage insurance fee.
The second way you can handle LPMI is to pay a one-time fee at closing. If you choose to pay off the entire policy in this closing fee, you keep the same rate and there’s no monthly mortgage insurance payment.
It’s also important to note that these options for handling LPMI aren’t mutually exclusive. You can pay a one-time fee that covers part of the policy at closing and have a lower rate on your mortgage with PMI Advantage than if you paid nothing at all upfront.
It’s important to note that LPMI programs like PMI Advantage are only available on conventional loans from Fannie Mae or Freddie Mac. If you have a loan through the FHA or USDA, you’ll have both upfront and monthly mortgage insurance premiums or guarantee fees.
Mortgage insurance enables you to get a home more easily, and you don’t have to pay it forever. Here are some strategies on how to ditch mortgage insurance.