When you purchase a home by financing it, lenders often require a mortgage insurance policy. Typically, it is the buyer's responsibility to pay the premium for mortgage insurance and most consumers are aware of PMI or private mortgage insurance. In addition, many soon-to-be homeowners know PMI is generally not required for loans with a down payment of 20 percent or more. However, this is not the only type of mortgage insurance, there are others: MIP, single premium PMI, and lender-paid PMI.

Different Mortgage Insurance Types Explained (PMI, MIP, Single Premium PMI, and Lender-Paid PMI)

As the nearby quote points-out, mortgage insurance is a risk transfer tactic used by lenders. It's provides financial protection in the event the borrower defaults on his or her home loan. In the state of Arizona, when a borrower defaults on a mortgage, lenders can use non-judicial foreclosure or judicial foreclosure to repossess the collateral property. The general timeline for a foreclosure process is approximately 90 days. Of course, currently, the percentage of distressed properties -- foreclosure and short sale -- are a very small representation of all available properties.

Mortgage insurance lowers the risk to the lender of making a loan to you, so you can qualify for a loan that you might not otherwise be able to get. Typically, borrowers making a down payment of less than 20 percent of the purchase price of the home will need to pay for mortgage insurance. Mortgage insurance lowers the risk to the lender of making a loan to you, so you can qualify for a loan that you might not otherwise be able to get. But, it increases the cost of your loan. --Consumer Financial Protection Bureau

The amount of mortgage insurance borrowers pay varies according to the type of debt instrument and the size of the down payment. However, the typical range of mortgage insurance is between 0.5 percent to 1 percent of the amount of the home loan. In addition, the premiums are paid in different ways and some types of mortgage insurance policies cannot be dropped. Here's a brief explanation of the different mortgage insurance types:

  • PMI. The most familiar type of mortgage insurance policy is private mortgage insurance. Usually referred to as "PMI," this type of mortgage insurance is paid monthly by the borrower until it's terminated by the loan balance reaching 78 percent; or, when the borrower requests cancellation after gaining 20 percent equity. It can also be removed at an amortization point during the term of the home loan.
  • MIP. If a borrower is approved for a FHA loan and puts down less than 20 percent, a mortgage insurance premium policy is generally required. The rate paid by the borrower depends on the mortgage term length and the loan-to-value ratio or LTV. For mortgages larger than $625,500, an increased percentage is paid.
  • Single premium PMI. Depending on the type of debt instrument, the borrower might have to obtain single premium PMI, which can be paid upfront during closing or rolled into the mortgage and paid monthly.
  • Lender-paid PMI. Though this might appear to be the best deal for mortgage insurance, there's a catch: while the lender "pays" the policy, the borrower is subjected to a higher loan interest rate over the whole term of the loan.
  • UFMIP. Another form of MIP is what's known as upfront mortgage insurance premium. This is for FHA loans as well and like the other MIP, it is paid during closing or is paid in monthly installments.

If you are considering buying a home in Coyote Lakes, around North Coyote Lakes Parkway, nearby West Union Hills Drive, North 116th Drive, or anywhere in Surprise, Arizona or elsewhere, give us a call to learn more about the local real estate market.