Common Mortgage Insurance Premium Questions Answered

Mortgage insurance premiums, commonly referred to as MIP, pose many questions for borrowers.  Mortgage insurance is an insurance policy where your mortgage lender is protected against the value of the outstanding mortgage liability in the event that you die or are disabled, and are unable to make mortgage payments. The typical beneficiary of the policy in this case is the bank. Since there may be cases where you require mortgage insurance either due to the requirement of your lender, or as a personal preference, you may want to go over some common queries related to mortgage insurance premiums listed below:

Calculation of Mortgage Insurance Premiums & Factors Affecting It

MIP is typically calculated as a percentage of the loan amount being borrowed.  MIP varies on the basis of factors such as the borrowers credit rating, the down payment being made, whether the mortgage is fixed or variable, debt to income ratios, etc. Generally, the range of the rates is between 0.50% and 0.90% of the loan value, with the calculation being based upon monthly premium payments.

FHA MIP & Portion of the Premium Due At Closing

Federal Housing Authority (FHA) mortgages requires MIP for its home purchase programs and tend to be slightly more expensive than MIP on conventional loans.  Typically, there is a portion of the MIP that must be paid at the time of closing. The amount is directly dependent on the amount being borrowed. FHA MIP typically has a 1.5% premium required at the time of closing that can be financed into the total loan amount. A monthly amount of 0.5% is then charged as the MIP as part of the mortgage payment. MIP for conventional mortgages generally have lower upfront premiums and renewal rates ranging from 0.3 – 0.5%.

Frequency of Premium Payments

MIP payments can be arranged to be paid as a lump sum, on an annual basis, or monthly basis. A large number of lenders often arrange to lump the payment into your monthly mortgage payment for ease of tracking and payment.

Lender Paid Mortgage Insurance

In certain cases, instead of the borrower making premium payments on the loan amount, the lender makes the premium payments without the borrower being explicitly made aware of the premiums. In this case, the amount of the premium is typically built into the mortgage payment.

Tax Treatment of Mortgage Insurance Premiums

MIP payments are tax deductible until 2010. However, there are additional benefits that are available based on specific circumstances.  A tax advisor can tell you more about your specific situation.

Removing Mortgage Insurance

In conventional mortgages, mortgage insurance is typically stipulated by lending parties when the borrower is making a down payment of less than 20% of the total value of the property. Once the mortgage reached the point where the equity portion exceeds 20%, mortgage insurance may be cancelled.

Refund of Mortgage Insurance Premiums

MIP payments are typically non-refundable. However, in certain cases, such as when MIP is paid as a lump sum at the time of sale closing, a small portion of the premium payments may be refunded to the borrower at the time that the policy is cancelled.

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