What is Mortgage Insurance?
Mortgage insurance is a tool to enable buyers to qualify for loans they may not otherwise have been eligible for.
Defaulting on payments, dying, or otherwise being unable to meet the mortgage’s contractual obligations are all possible outcomes for a borrower covered by mortgage insurance. Private mortgage insurance (PMI), qualified mortgage insurance premium (MIP) insurance, or mortgage title insurance are all examples of types of mortgage insurance. In all of these situations, the borrower or owner of the property is obligated to make the other whole in the event of a loss. Mortgage insurance is typically required for borrowers who put down less than 20% of the purchase price of their home. FHA and USDA loans typically require mortgage insurance as well. To help you qualify for a loan that you otherwise wouldn’t be eligible for, mortgage insurance lowers the lender’s risk in lending to you. You’ll have to pay a higher interest rate on your loan. Your monthly payment to your lender or the costs at closing may include mortgage insurance if you are required to do so.
All mortgage insurance is designed to protect the lender – not you – should you default on your loan. Defaulting on a loan can have a negative impact on your credit rating as well as the likelihood of losing your home to foreclosure.
Your Jacksonville, FL Mortgage lender will be able to explain whether or not you will need Mortgage Insurance and how to best navigate those waters.
Mortgage Insurance and Different Loan Types
Conventional Mortgage Loan in Jacksonville, FL
Mortgage insurance can be arranged if you get a conventional loan. For borrowers with good credit, private mortgage insurance (PMI) rates are generally less expensive than FHA rates. There is little or no up-front payment for most private mortgage insurance when the loan is closed. You may have the right and ability to cancel your PMI coverage in certain situations.
Federal Housing Administration Loan (FHA)
For FHA loans, the Federal Housing Administration (FHA) collects your mortgage insurance premiums from you. The Federal Housing Administration must insure all FHA loans. With a minimum down payment of less than 5%, there is no difference in the price, regardless of one’s credit score. At the time of closing, you will need to pay a one-time fee for FHA mortgage insurance, and a monthly fee will be added to your mortgage payment. Typically the mortgage fee can be added to your mortgage, but this will increase the principle and interest rate of the associated loan.
The USDA loan program is similar to the Federal Housing Administration (FHA) but is usually less expensive. Purchasing insurance is something you’ll do both up front and on a monthly basis. To avoid paying upfront insurance premiums, you can choose to include them in your monthly mortgage payment, but doing so increases both the loan amount and overall costs.
VA Loans in Jacksonville, FL
The VA guarantee replaces mortgage insurance and functions similarly if you obtain a loan backed by the Department of Veterans Affairs (VA). There is no monthly mortgage insurance premium with this type of loan. These loans are designed to help service members, veterans, and their families. A “Funding Fee” will be required up-front. The fee is determined by a number of factors, including:
- What branch of the military are you in?
- Your initial payment amount
- If you have a disability
- Whether you’re purchasing or refinancing a home
- Whether you’ve ever had a VA loan before
The upfront fee can be rolled into your mortgage, as with FHA and USDA loans, instead of being paid out of pocket, but doing so raises the total amount of your loan and your costs.
How Does Mortgage Insurance Work?
There are two ways to pay for mortgage insurance: either by making a regular monthly payment, or by putting down a lump sum at the time of the loan’s origination. Those who must have PMI because of the 80 percent loan-to-value ratio rule can request that the insurance policy be canceled once 20% of the principal balance has been paid off. Mortgage Insurance simply acts as collateral for the lender.
What Factors Impact my PMI?
Type of Loan
The type of loan you take out can affect the amount of PMI you’ll have to pay. As an example, because the interest rate won’t fluctuate, fixed-rate loans can reduce the risk associated with the loan. You may not have to pay as much PMI if you have a lower risk profile.
Your Credit Score and Credit History
Our Jacksonville Mortgage Lender will conduct a credit check on you.
Your credit score can tell lenders how well you’ve repaid loans you’ve taken out in the past. Good credit history and a high credit score can lead to lower PMI premiums from lenders who know you’re a responsible borrower.
It’s possible that your lender has less faith in your ability to handle debt responsibly if you have a lower credit score. As a result, your PMI premiums may go up.
Your Down Payment Amount
Typically, if you cannot put down 20% on your house, you will have to pay PMI. Having a smaller down payment means that the lender has a greater risk of losing money if you default on your loan and your home is foreclosed on.
Paying less in the down payment means higher monthly payments and a longer wait before your PMI can be canceled. All of this raises your risk of falling behind on your PMI payments, resulting in a higher premium.
If you can, Increase your down payment, even if you can’t afford 20%, to reduce the amount of PMI you must pay.
Get a Mortgage Loan in Jacksonville, FL
Please contact one of our experienced Jacksonville mortgage loan representatives right away if you or someone you care about is in need of a Jacksonville mortgage loan. Bayway Mortgage Group has been helping people like you buy their dream homes for more than a decade. Please get in touch with us as soon as possible!