Need to Know: How Mortgage Insurance Works

Chances are you know you’ll need homeowners (property) insurance when purchasing a home, but are you familiar with mortgage insurance (MI)?

MI is quite different from your homeowners policy, and it works differently: It’s what lenders use to insure themselves should you, the borrower, default on your loan.

MI also behaves differently in conventional (Fannie Mae) mortgages and FHA mortgages. On a conventional mortgage purchase transaction, for example, MI is only required if you are putting down less than 20 percent. In this case, you’ll pay a premium that is based on the amount of down payment, meaning if you put 15% down, you’ll pay a lower premium than if you had a 10% down payment.

With FHA there are actually two MI payments. The first is called an “upfront premium,” and is paid at closing-either by financing it or by paying it out of your pocket. The other is combined with your monthly mortgage payment.

FHA MI tends to be more expensive than conventional mortgage insurance, but the benefit to borrowers of having an FHA mortgage is that the qualification guidelines are less restrictive.

There is another significant difference between conventional insurance and FHA MI: In conventional, you may be able to have the MI removed at some point in the loan’s life by paying down the principal or if the property value increases.

With FHA, MI remains in place for the life of the loan or until you sell the property or refinance into some other type of mortgage program, such as conventional. This is a fairly recent change, and under some circumstances, older FHA mortgages may be grandfathered; those borrowers may be able to have the MI removed.

If you need any other information on mortgage insurance or help deciding whether to go with a conventional or an FHA mortgage, talk to your mortgage professional.

Mortgage Rates and APRs: What’s the Difference?

When you are shopping for a mortgage, there are two numbers you need to be concerned with: the interest rate and the annual percentage rate (APR).

The interest rate is the annual cost of borrowing and doesn’t include fees or other charges.

APR reflects the interest rate, but also the cost of financing the transaction over the term of the mortgage. If you have ever financed a car, you have seen the same terminology. The process works in very much the same way with a mortgage.

When you finance a home, you have expenses that you wouldn’t have if you were to pay in cash. This would include lender fees, such as origination charges and processing fees, and non-lender fees, for items such as an appraisal.

If you could pay cash, lenders and lender-required appraisals wouldn’t be necessary, and there wouldn’t be associated fees. If not, these fees and others become part of the financing of your mortgage.

Two lenders may be offering the same rate and same terms for the same mortgage, but the lender’s APRs could be quite different. The one with the higher APR will be charging higher lender fees and has a higher cost for financing your mortgage.

Mortgage companies are now required to display APRs prominently in their mortgage advertising, and often dollar amounts of items included in the APR will be listed in the advertisement.

While APR isn’t the only factor in comparing lenders, it is one way to help you distinguish between offers.