Home Insurance Articles
Differences Between Home Insurance PMI
2010-05-23
When purchasing a home, the lender often requires mortgage insurance as an extra layer of protection in case the buyer defaults on the mortgage loan. It is a policy that can be written by private insurance companies or by public agencies, e.g., the Federal Housing Administration (FHA). One loan not subject to these conditions is a Veteran's Administration (VA) loan. The VA allows veterans to finance 100% of a mortgage without requiring mortgage insurance.
Private Mortgage Insurance (PMI) is generally insisted on by the lender when the buyer's equity is less than twenty percent, which means any down payment that is less than that number, resulting in a Loan To Value (LTV) greater than 80%, will trigger the requirement. FHA loans require FHA Mortgage Insurance for any FHA loan. FHA Mortgage Insurance must be in place for five years, but can be canceled after that time if LTV is 78%. PMI can be canceled when the equity reaches 20% or greater. Insurance rates vary depending on the size of the down payment, the amount of insurance coverage, and the type of mortgage.
There are two general types of Mortgage Insurance, Buyer Purchased Mortgage Insurance (BPMI) and Lender Purchased Mortgage Insurance (LMPI). BPMI premiums are generally included in the monthly loan payments, but can sometimes be paid as a single sum at closing, or can be paid annually. LMPI is often included in the loan amount for loans with high LTV advertised as not needing insurance. For buyers with low credit scores, the insurance rates for an FHA loan will be much less than with a private lender.
The benefits of home insurance, especially mortgage insurance, have historically been to keep the housing industry healthy than was the case before the National Housing Act of 1934, which established the FHA in response to the locking up of the housing market in the Great Depression. An FHA loan came with a regulated interest rate, thus allowing more buyers to secure loans. For the individual buyer in today's market, the benefits of home insurance are that it allows first time buyers the ability to clear the first big hurdle to home ownership: coming up with a twenty percent down payment. For buyers that are trading up from their existing homes, it allows them greater choice among available houses, and to leverage their investment in their homes. For both classes of borrowers, PMI permits them to keep more of their cash liquid, and free to use to invest, pay off debt, or make home improvements.
Whichever one of the various type of Mortgage Insurance is picked, it is a very valuable tool for seekers after a key component of the American Dream: home ownership.