Red Blue Realty’s experts note the FHA serves as the insurer for lenders servicing FHA loans. Private mortgage insurance (PMI) is also offered to borrowers and charged on thirty year conventional fixed rate loans.
Borrowers often ask if the insurance is required, and it is, at least in regard to most loans. Every FHA loan charges an up-front insurance premium, for example. The amount of this charge varies by the market interest rate and the length of the loan period undertaken. Some private adjustable rate mortgage (ARM) loans do not require the mortgage insurance premium.
The next question that Red Blue Realty’s experts can answer is a common one from borrowers -- why is this insurance necessary? The answer concerns borrower risk. Mortgage lenders justifiably want to eliminate as much risk as possible in regard to a loan. They seek security and preparation in the case of the worst possibility occurring in regard to risk - a borrower defaulting on the loan and the foreclosure of a property. The cost of foreclosure combined with the very real possibility of selling such a property at a loss in an auction, sets the stage for a safety net for lenders. So, what is a mortgage insurance premium? It’s the lender’s safety net.
The FHA created a loan program that essentially allows borrowers to pay for this risk to the lender through it’s monthly insurance. Without such insurance many lenders wouldn’t accept the risk of lending to a borrower, unless the borrower could provide a substantial down payment. The mortgage insurance premium serves its purpose as a safety net for lenders, and with it in place, borrowers receive the benefit of loan acceptance. In other words, without the MIP, borrowers would find it more challenging to purchase a property to begin with, much less utilize home equity amounts, or borrow in order to perform home improvements.
While mortgage insurance isn’t something that borrowers usually understand the benefit of, the ultimate advantage of the insurance itself may be that borrowers were able to purchase a property. It stands as an unloved necessity for borrowers as well as being a requirement for lenders.
Of course, regardless of the mutual benefit of mortgage insurance borrowers still often wonder if they can stop paying for it. There are two ways that this can occur for a borrower:
• first, they can refinance without mortgage insurance
• second, they can achieve an automatic termination of the insurance program when a set amount of equity has been established in the home.
In regard to the first possibility, this can occur when a thirty year FHA conventional loan is replaced by an equity building fifteen year loan. However the exact timing of the automatic termination option can be somewhat unclear, as it does not take look at appreciated value in a home, and is naturally dependent upon the type of uninsured loans available and their cost to borrowers.