Navigating the ins and outs of the mortgage process can seem overwhelming. If you’re unfamiliar with home loans, the best thing you can do is educate yourself. A better understanding of the process will help you feel confident, making it the overall endeavor less stressful.
Upfront Mortgage Insurance might be one of those aspects of home loans with which you are unfamiliar.
What is mortgage insurance?
Generally speaking, mortgage insurance is an insurance policy that compensates lenders should the borrower default on the loan. If you’re the one borrowing money, mortgage insurance lowers the risk for the bank or institution granting you the loan. This helps you qualify for a loan that you might not otherwise be able to obtain.
Typically, buyers who have less than 20% of the total mortgage amount to offer as a down payment are required to carry mortgage insurance. When borrowers have little equity in their homes, the risk to the lender is much higher. Mortgage insurance mitigates that risk and enables lenders to offer home loans to those who prefer smaller down payments.
What’s the difference between private mortgage insurance and upfront mortgage insurance?
Private mortgage insurance is collected by a conventional private lender when the borrower makes less than a 20% down payment. Though upfront mortgage insurance is similar, there are a few minor differences.
Upfront mortgage insurance is an insurance premium typically collected on Federal Housing Administration (FHA) loans. The premium is collected when the loan is initially made and added to the total mortgage amount. Since FHA loans typically have smaller down payments–some as low as 3.5%–upfront mortgage insurance helps the FHA to recoup lost funds if the borrower defaults on the loan.
Upfront mortgage insurance premiums are 1.75% of the total loan amount collected by the FHA. This premium is in addition to traditional mortgage insurance premiums that range from 0.45% to 1.05% of the total mortgage.
How long will I pay upfront mortgage insurance?
Borrowers are expected to carry mortgage insurance until you’ve paid off a sufficient amount of your mortgage. This number is determined by the loan-to-value ratio on your mortgage. Fortunately, this is calculated before your mortgage is processed and can be included in the final loan amount.
Still have questions about upfront mortgage insurance?
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