Mortgage insurance (MI) pays the lender if you default on your mortgage. Also called private mortgage insurance (PMI), it is generally required by the lender if your down payment is less than 20% for conventional financing. You the borrower pay the premiums, which are typically included in your monthly mortgage payment unless you finance them into your loan amount or pay for them upfront when you close on the loan. Fees for PMI vary depending on the size of the down payment and your credit score. The fees are lower the higher your credit score and the closer your down payment is to 20%. For conventional loans, you no longer need to pay for mortgage insurance once you’ve paid down your principal so that you owe only 78% of the value of your home if you occupy the home as your primary residence.
The Federal Housing Administration (FHA) is a government agency that requires mortgage insurance. This insurance is tied to their FHA insured loans, which have lower down payment and credit score requirements. With FHA mortgage insurance, you have an upfront insurance that is typically financed into the loan amount and an annual premium that is required to be paid monthly, in your monthly mortgage payment. The monthly mortgage insurance for FHA loans varies depending on when your loan originated. Current regulations retain monthly insurance for the life of the loan, regardless of your loan to value. Most borrowers that have seen an appreciation in their home value will refinance to a conventional loan when their equity in their home reaches 80% of the value.
PMI premiums may be tax deductible some years, depending upon how Congress votes on the matter. Always consult a tax professional before making any decision with tax implications.
If you have any questions about this or any part of the home buying or refinancing experience, please contact us today.