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Demystifying Mortgage Insurance

Toprock Real Estate Denver April 5, 2023

Private Mortgage Insurane (PMI) and Mortgage Insurance Premiums (MIPs) are two types of insurance that protect lenders in case borrowers default on their mortgages. Both types of insurance allow borrowers to put down less than 20% of the home's purchase price and still qualify for a mortgage. However, PMI and MIP work differently, and it's important to understand the differences.
 
PMI is typically required on conventional mortgages, which are not backed by the government. The cost of PMI varies depending on the size of the down payment and the borrower's credit score, but it typically ranges from 0.3% to 1.5% of the original loan amount per year. PMI payments are usually included in the monthly mortgage payment and continue until the borrower has paid off enough of the loan to own at least 20% equity in the property.
 
MIP, on the other hand, is required on government-backed mortgages, such as FHA and USDA loans. The cost of MIP varies depending on the loan amount, down payment, and loan term, but it typically ranges from 0.45% to 1.05% of the original loan amount per year. MIP payments are usually included in the monthly mortgage payment and continue for the life of the loan, regardless of the borrower's equity in the property.
 
While both PMI and MIP serve the same purpose of protecting lenders, they have different requirements and costs. Borrowers should weigh the costs of each type of insurance when deciding on a mortgage, and should also consider options for removing PMI or refinancing to a conventional loan to eliminate MIP payments.
 
In conclusion, private mortgage insurance and mortgage insurance premiums are two types of insurance that allow borrowers to put down less than 20% of the home's purchase price and still qualify for a mortgage. While they serve the same purpose of protecting lenders, they work differently and have different costs and requirements. Borrowers should carefully consider their options when deciding on a mortgage

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