Mortgage insurance, also known as Mortgage guarantee or home-loan insurance, is a type of insurance that protects a mortgage lender in the event that a borrower fails to make payments.
Mortgage insurance can be purchased with a typical pay-as-you-go premium payment or as a lump-sum payment at the time of mortgage origination.
However in this there are different types mortgages offered in the market. These are:
1. Borrower-paid mortgage insurance (BPMI)
is a type of mortgage insurance that is paid for by the borrower. BPMI is required when a borrower makes a down payment of less than 20% on a home purchase and is intended to protect the lender in case the borrower defaults on their mortgage loan.
BPMI is an additional monthly payment that is added to the borrower's mortgage payment and continues until the loan-to-value (LTV) ratio of the mortgage drops below a certain level, typically 78%. At that point, the borrower may have the option to cancel the mortgage insurance.
BPMI allows borrowers to obtain a mortgage with a lower down payment and can make homeownership more accessible, but it also increases the overall cost of the mortgage over time. Some borrowers choose to pay off their mortgage more quickly or make a larger down payment in order to avoid paying for BPMI.
2. FHA Mortgage Insurance Premium (MIP)
is a fee required by the Federal Housing Administration (FHA) to insure mortgage loans that it backs. The MIP is paid by the borrower and is a one-time fee at closing, as well as an annual premium that is added to the monthly mortgage payment. The purpose of the MIP is to protect the lender in case the borrower defaults on their mortgage.
The FHA MIP is calculated based on the loan amount, the down payment, and the loan-to-value ratio. It is a percentage of the loan amount and ranges from 1.75% to 2.25% at closing, and 0.85% to 1.05% annually, depending on the type of loan and the length of time that the borrower is expected to keep the loan. The FHA MIP can be paid upfront or added to the mortgage balance.
FHA MIP is required for all FHA-backed loans and is an important factor to consider when comparing mortgage options. The MIP can significantly increase the monthly mortgage payment, so borrowers should be aware of the cost and plan accordingly.
3. Lender-paid mortgage insurance (LPMI)
is a type of mortgage insurance that is paid by the lender rather than the borrower. This type of mortgage insurance is typically offered as an option for borrowers who are unable or unwilling to pay the mortgage insurance premium (MIP) upfront or as part of their monthly mortgage payment.
In a LPMI mortgage, the lender pays the insurance premium and adds it to the interest rate of the loan. This results in a higher interest rate for the borrower, but it eliminates the need for the borrower to pay an upfront MIP or an ongoing monthly MIP.
LPMI is often marketed as a way to reduce the monthly mortgage payment and avoid the upfront cost of MIP. However, it is important to understand that the higher interest rate will result in higher overall costs over the life of the loan. Borrowers should carefully consider the trade-off between lower monthly payments and higher long-term costs before choosing LPMI.
It is also important to note that not all lenders offer LPMI and that some mortgage insurance providers do not offer it at all. Borrowers should shop around and compare different options before choosing a lender-paid mortgage insurance plan.
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