What is a Mortgage Insurance Premium?

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You may not know the answer to the question what is a mortgage insurance premium? Red Blue Realty notes that many of our clients are unaware of both the purpose and value of a mortgage insurance premium and what it means. We know that most people consider insurance as something that benefits them directly, if there should be an accident, emergency, or some type of loss. But the Mortgage Insurance Premium or MIP protects the lender rather than the borrower – it serves as a financial guarantee for a lender instead, even though it is the borrower who pays for it. The MIP basically exists to help the lender with loss reduction if there is a default by a borrower. Naturally, we understand that many of our clients don’t see the program’s value, but the truth is that having this premium in place may actually allow you to qualify for a mortgage.

We want to note that while the FHA serves as the insurer for lenders who service FHA loans, private mortgage insurance (PMI) is also offered for borrowers with loans not funded by the FHA, and it also is charged on thirty year fixed rate loans.

You may be asking if this insurance is required, and the answer is yes, it is, at least in regard to most loans. Every FHA loan charges this up-front insurance premium. And what does it cost? The amount varies by the market interest rate and also by the length of the loan period you undertake. Some private adjustable rate mortgage loans don’t require the mortgage insurance premium, but may not be the loan for you anyway.

The next question we hear is this — why is the insurance even necessary? The answer is all about borrower risk. Mortgage lenders want to eliminate as much risk as possible in regard to approving your loan. They want coverage in the event of a disaster the same way you would – but for a lender the disaster is a borrower defaulting on the loan and the subsequent foreclosure of a property. The cost of foreclosure and the possible loss by selling a home at auction following a foreclosure means that lenders want a safety net of some kind. So, what is a mortgage insurance premium? It serves as the lender’s safety net.

The FHA created a loan program that provides this net. It allows you, the borrower, to pay for this risk to the lender through monthly insurance premiums. It doesn’t sound like much of a benefit to you, but the fact is that without this insurance many lenders wouldn’t accept the risk of lending without a substantial down payment. The mortgage insurance premium serves its purpose for lenders, but with it in place, you can receive the benefit of loan acceptance. In other words, without the MIP, you would certainly find it more difficult to purchase a property without a large down payment, and find it harder to use home equity or borrow for home improvements.

So, while you may not see the benefit of mortgage insurance immediately, it truly is a necessity for borrowers as well as being a lender requirement.

Naturally, whether you see the mutual benefit of mortgage insurance immediately or not, you might still wonder if you can ever stop paying for it. There are two ways for you to do so:

- first, you can refinance without mortgage insurance
- second, you can automatically terminate the insurance program when a set amount of equity has been established.

In regard to the first option, you can do this by converting a thirty-year FHA conventional loan to an equity building fifteen-year loan. Note that the exact timing of the automatic termination is a little unclear, as it doesn’t look at appreciated value in your home, and depends on the type of uninsured loans available and the borrowers cost to obtain them.

So the ultimate answer to what is a mortgage insurance premium is that it’s a program that assists both lenders and you, the borrower, in securing their home.

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