Mortgage Insurance is very common for today’s Santa Cruz home buyer. Mortgage Insurance is a special insurance banks put in place to avoid losses in case of a borrower defaulting on their loan. The most common time mortgage insurance required is used inSanta Cruz is when a borrower comes in with less than a 20% down payment. The concept is that lenders typically require a 20% down payment, as they have researched, that this amount of equity in a property statistically reduces the changes of a borrower walking away form their obligation. At 20%, a lender believe this is enough of a buffer between the loan and the value of the home to pay for any attorney fees, REALTOR costs, repairs, etc. in the event they have to foreclose on the borrower. 

There are different terms that are thrown around describing this insurance. PMI stands for private mortgage insurance. The terms MIP or MI are acronyms for Mortgage Insurance Premium or Mortgage Insurance (respectively). They all generally mean the same concept. 

Depending on your loan type, there may be different rules, costs, or ways mortgage insurance is both added onto the loan and requested off. Besides loan type which I will cover below, the typical factors that affect Mortgage Insurance are 

1) Credit Score: lower credit scores have higher mortgage insurance premiums. Typically to get the best and cheapest priced insurance you should be above 760 FICO

2) Down payment: the lower the down payment the higher the cost for mortgage insurance

3) Term and type of loan: short terms loans of 15 years carry cheaper monthly costs than higher term loans

4) Specific loan program: there are some first time homebuyer programs that if the property both falls within a certain area or the borrower takes a first time homebuyer class, the rates for mortgage insurance are cheaper. 

The most common mortgage insurances are as follows: 

Conventional Monthly Mortgage Insurance: A monthly insurance premium included in the mortgage payment. This amount can be eliminated by a few different ways. Upgrading your property, or principal pay-down or waiting the required time are common ways to eliminate the monthly cost. If thinking of removing it, its best to contact your servicing bank and ask for the PMI removal letter/guidelines which make it very clear what the current requirements are.  

Conventional Mortgage Insurance Buyout: This is a one time fee/amount paid to the mortgage insurance company as an opportunity to “pay off” the mortgage insurance up front. Doing this eliminates the monthly charge. The Buy Out amount is typically 1/3rd the cost compared if you were to keep it for the regular monthly term. 

FHA Mortgage Insurance: The FHA loan has quickly become the loan of choice for first time homebuyers. With low down payments, flexible minimum credit score requirements and flexible underwriting standards it has been a valuable tool for many first time homebuyers. HUD (the administrator of the FHA loan program) requires that a specific rate for monthly mortgage insurance be charged for every FHA loan. in addition they require an up front amount to be paid. This can be paid by either financed into the loan amount (added to your principal balance) or allowing a borrower to pay the amount up front included in closing costs. In the past a borrower could remove the PMI after as little as 5 years. Now FHA has made the insurance a permanent feature of the FHA loan, where the only way to remove it is by refinancing. 

Although an added cost to a mortgage payment sounds like a detriment, without the ability to obtain Mortgage insurance, we would go back the old times of needing 20% of the value of the home as a down payment. This would reduce the amount of borrowers that would be able to be homeowners and a true detriment to the first time homebuyer.