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Mortgage Insurance and Your Payment

Mortgage insurance, like anything else involved in your monthly payment, can have a direct impact on how much home you can afford to purchase. Lets start by understanding what mortgage insurance is.

Mortgage Insurance - A premium paid to a qualified insurance company or government body which protects a mortgagor against loss resulting from a default by a mortgagee on a mortgage loan.

What is a mortgagor? It is the mortgage holder or the party that holds and/or controls a lien against a property.

What is a mortgagee? That would be you, the borrower.

Anytime a home is purchased and the loan to value, that is the amount financed versus the purchase price of the home, exceeds 80%, you can expect mortgage insurance to be applied. The lone exception comes in the form of self insured notes which typically cover the premium amounts within the rate of interest paid versus a lower rate of interest and monthly payment.

So how do you calculate what you can expect to pay?

VA Loan - A VA Loan has no monthly premium associated with the loan. The qualified veteran will only pay a one time upfront funding fee which goes into a Pool that protects investors against default. This up front fee is included in the balance and financed with the mortgage. See Example Below.

FHA Loan - The FHA Loans up front premium can vary year to year based upon default rates of the pool. As of this writing the up front fee is 1.5% of the loan amount. This up front fee is included in the balance and financed with the mortgage. The monthly payment is calculated based upon the FHA program used and the monthly premium is paid over a, mandated by statute, minimum 5 year period. These premiums are know also as MIP or Mortgage Insurance Premium. The example below uses the standard FHA section of the act which is basically a 30 year fixed rate note.

Conventional Loans - Use private qualified insurance companies to protect the mortgagor against loss. Also known as PMI or Private Mortgage Insurance. Like any insurance, premiums will vary according to what company is issuing the policy and the risk rate assumed by the insurance company in the form of default rates for the subject lender. (Claims) The monthly premium is calculated based upon the balance financed versus the purchase price. The higher the loan to value, the higher the factor used to assess risk and your premium. The example below uses a 97% LTV (loan - to - value) from one such rate sheet to factor a sample monthly premium. PMI can be canceled only by the mortgagor and will normally be canceled when it has factored the LTV to be less than 80% of the balance owed or a home owner provides acceptable form of documentation that the LTV is less than the 80% threshold. This is usually done by providing an acceptable updated appraisal.

Sample Calculated Monthly Premium Charts (All charts represent 97% loan to value):

VA Home Loan Factors Dollar Amounts
Proposed Principle Balance $97,000.00
Annual Premium Factor 0% $0.00
Monthly Premium /12 $0.00
Up Front Premium 3% $2,910.10
Amount Financed $99,910.10
FHA Home Loan Factors Dollar Amounts
Proposed Principle Balance $97,000.00
Annual Premium Factor .5% $485.00
Monthly Premium /12 $40.41
Up Front Premium 1.5% $1,455.00
Amount Financed $98,455.00
Conventional Home Loan Factors Dollar Amounts
Proposed Principle Balance $97,000.00
Annual Premium Factor 1.14% $1,105.80
Monthly Premium /12 $92.15
Up Front Premium 3% $0.00
Amount Financed $97,000.00

As you can see, the VA Loan offers the highest single loan benefit in the form of affects on your monthly payment. This is followed by the FHA program and the conventional program, whose premiums are typically double that of an FHA MIP.

One of the advantages of the FHA loan is the ease in qualifying and the lower monthly premiums for mortgage insurance. One of the disadvantages is the up front MIP coupled with a mandatory 5 year monthly premium requirement. However, if one assumes the time frame will be the same for a conventional loan, then the FHA program would offer the biggest advantages both in long term direct costs and the additional purchase power the lower monthly premiums will provide.

Home Buyer Education:
Troubled Loan Warning Signs

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