I Keep Hearing “This Loan Insured By,” What Does It Mean?

There’s a term that always floats around the mortgage and real estate industries called “mortgage insurance”. You hear it often because some of the most prevalent loans of recent—FHA loans—require both one-time, up-front mortgage insurance as well as monthly mortgage insurance on high loan-to-value loans.

Unfortunately, nobody seems to eager to explain this to you or tell you what its impact is on your home loan… until now! We’ve done a bunch of research on your behalf to give you a nice, easily digestible article about what mortgage insurance means. So, here are five things you need to know about mortgage insurance.

It’s Like Regular Insurance, But Not

Mortgage insurance is a type of insurance. It protects someone in the event of a loss. In this case, it protects the mortgage company against losing money should you quit paying for your mortgage. That’s kind of where the “like regular insurance” part ends. Because even though it protects the lender, you as the borrower are the one who pays it.

There Are Two Types of Mortgage Insurance

You have to get mortgage insurance on pretty much any loan with less than 20 percent down. There are, however, two types of mortgage insurance. There’s private mortgage insurance (PMI), which you usually get with a conventional loan, and there’s government mortgage insurance, which you get with an FHA or VA loan. Government mortgage insurance has an up-front premium as well as a monthly premium.

To Be Fair, It’s Not Always Required

It’s true; you don’t always have to pay mortgage insurance. Typically mortgage insurance is only required on loans when the down payment is less than 20 percent. So, if you’ve got a sizeable enough down payment saved up, you’re good. Otherwise, plan on paying mortgage insurance.

Even If You Have To Pay It, It Won’t Last Forever… Mostly

Now, private mortgage insurance can usually be canceled when you reach over 20 percent equity in your home. Typically, you’d call your lender, request to have your PMI removed, get an appraisal, and boom(-ish). (Note, this will not happen automatically so you’ll want to be proactive about it.)

With government mortgage insurance however, it’s not so rosy. Starting in 2013, if you get a loan with less than 10 percent down, you’re going to hold on to that mortgage insurance for the life of the loan. If you achieve equity and/or pay down your mortgage, you may want to look into refinancing to remove mortgage insurance.

Even Though It Stinks, It’s Probably A Good Thing

Mortgage insurance may seem like kind of a racket. You pay the premiums on something that covers the guy on the other side, you don’t get to pick whom it comes from, and you might be stuck paying it forever.

That being said, without the invention of mortgage insurance, people with less than 20 percent down probably wouldn’t be able to purchase a home, period. I bet that would put a lot of people (including most of you reading this) out of homeownership’s reach.

Nice newsletter. Good article. Good information. Thank you. Carol

For conventional financing, borrowers with scores at 740 or anywhere above generally receive the same loan pricing (rate and cost). That being said, the better your credit the higher your chances of receiving loan approval with high debt to income (up to 50%) or high loan to value (up to 95%) which can be a major benefit when applying for a new loan. For Jumbo financing, borrowers with credit scores above 800 are generally rewarded with both better pricing and easier guidelines. There are no situations where better credit is a negative when obtaining new financing so we should all continue to strive to reach and then stay in the 800’s.

What are the advantages of a score over 800

Thank you Mike for this information. As a residential realtor the information that you provide is crucial to a successful transaction for my clients. You are indeed a pleasure to recommend to all of my clients. You are so professional, thorough, conscientious and pleasant to work with. !!

Hi Dane! Wanted to make sure I'm clear on this. Am I right in saying that on whichever remodel is done you still take a loss rather than an increase in value - the ROI will never exceed 100% of cost?