There are two kinds of mortgage insurance, private mortgage insurance or PMI and the mortgage insurance which is on all FHA loans, MIP or mortgage insurance premium.

Both types of mortgage insurance are designed to cover a lender in the event of a loss but there are many differences between the 2.

FHA charges both a 1 time upfront Mortgage Insurance Premium (UFMIP) which is currently 1.75% of the loan amount.   There is also an annual Mortgage Insurance Premium (MIP) which is paid monthly out of your mortgage payment.  FHA recently reduced the annual MIP for the 30 year fixed rate mortgage from .85% per year to .55% per year if you make less than a 5% down payment. If you put more than 5% down it was reduced from 0.8% to 0.5%. This insurance rate is fixed and does not change year after year.  It also doesn’t matter if you have a 740 credit score or a 640 credit score.  Everyone gets the same rate.

It’s important to understand that FHA is a self-insuring Department within HUD.  All of their insurance premiums come from borrowers obtaining FHA loans.  The US Government does not fund this Department.  Their claims are paid out of the insurance premiums they collect. From time to time FHA will adjust these premiums based on the performance of their assets and market conditions. Because FHA is governed by Congress any changes they want to make to the program must be approved by the House and Senate.

Private mortgage insurance on the other hand is quite different. Private mortgage insurance is offered by large insurance companies such as Genworth Financial, MGIC (The Mortgage Guaranty Insurance CO) and Radian Guaranty among others. They too will increase or decrease their rates based on the performance of their assets and market conditions.  While they provide mortgage insurance for conventional loans, they are not influenced by anything other than their own asset portfolio and real estate market conditions.

Unlike FHA’s annual mortgage insurance premium which is at a fixed percentage, PMI is driven by credit score, amount of down payment and even debt ratios. The higher the credit score, the lower the debt ratio and higher the down payment the lower the annual PMI. The lower the credit score, the higher the debt ratio and the least down payment the higher the annual PMI.  Finally this rate is not fixed.  It actually goes down slightly year after year.

If you have less than a 20% down payment, it’s important to evaluate all mortgage insurance options for both FHA and Conventional loans.  Market conditions such as interest rates and whether it’s a buyer or seller’s market, influence whether one program is better than another.  An educated borrower leads to a responsible homeowner!  Let us Educate you, Prepare you and Execute your loan closing!