Mortgage Insurance vs Default Insurance

Mortgage Insurance, Default Insurance, Homeowners Insurance, Mortgage Life Insurance… it can be confusing!!

Homeowners policies and Mortgage Life Insurance (issued by companies like State Farm) have been around for a long time – and protect you as a consumer against catastrophes like hurricanes or disability.

As a general rule of thumb mortgage insurance (for conventional loans) are required for loans with less than 25% equity in the property.  For government loans – you can count on having Mortgage Insurance no matter how much equity you have in the home.

Mortgage Insurance and Default Insurance are virtually the same thing. They are called by different acronyms, dependent upon the mortgage loan program you are using to finance your home.  It was put into place in the early 1970s to protect lenders against gigantic losses created by large numbers of foreclosure (like the economic conditions we find ourselves in today!) Mark Flanders, of Spokane wrote a great article on potential ways to AVOID paying PMI – although these options are quickly going away.

Conventional loans refer to mortgage insurance as PMI, and can be financed, paid by the Lender, or paid on a monthly basis.  Here’s some more information…

1. One-Time Financed mortgage insurance. We recommend this mortgage insurance product on a regular basis.   A discount is offered in the mortgage insurance rate as the PMI company receives full payment “upfront.”  The premium is added to the loan balance, however it doesn’t adversely affect your equity position, as there are provisions for refunding pro-rated monies back if you sell or refinance.  There are also tax advtanges as your loan amount will be higher.
2. Lender Paid Mortgage Insurance. If you elect this program, the lender will pay for your mortgage insurance by giving you a higher interest rate. There are times when this might be a good choice (depending on your goals and how long that you will be in the house) and there are times when Investors offer “specials” making this one of the best options. As a borrower who might need PMI – always consider what the TOTAL payment will be.  This payment is often the lowest of the option available – and again you receive the tax advantage of paying slightly more interest.
3. Monthly mortgage insurance. The “oldest” form of PMI is the monthly paid insurance.  As with all of these programs, the insurance rate is determined by program, FICO and overall investment in the property.  This insurance is the only one (mentioned here) that you can have removed once you gain the required equity in the property. It is also generally the most expensive on a monthly basis.

This is important to understand, especially if you are considering a REFINANCE!

If you are interested in learning more about Mortgage Insurance, or getting pre-qualified for a FHA loan in Raleigh, contact Steve and Eleanor Thorne, NC Mortgage Experts in Cary, NC, 919-649-5058  We offer the BEST Mortgage Rates!