What are Private Mortgage Insurance (PMI), Mortgage Insurance Premium (MIP), Homeowner Title Insurance (HTI), and Lender Title Insurance (LTI)? These terms describe the different types of insurance you may need when you purchase a home. However, there are significant differences between these types of insurance. Many first-time homebuyers don’t know what these types of insurance cover and why they need them. Even some real estate agents are confused. Homebuyers should be aware of the additional costs that they may have to pay to obtain these insurance coverages and whom the insurance protects.
What is PMI? PMI is private mortgage insurance for conventional loans, which protects the lender in case the borrower defaults on their mortgage payments. PMI does not protect the borrower if they fall behind on their payments, and they will still lose their home. When you apply for a mortgage loan, most lenders will require PMI unless you put down at least 20% of the home purchase price as a down payment. PMI generally costs between 0.5% to 1% of your annual mortgage principal balance and is added to your monthly payment. If your down payment is less than 20%, the PMI is non-negotiable for most types of loans. When you pay down the loan so that the loan balance is less than 80% of the appraised value of the home or the equivalent of a 20% down payment, the lender will remove the PMI. The amount of the down payment as a percentage of the loan amount determines the PMI payment. If the down payment amount is smaller, the PMI is higher. Your credit history also affects your PMI premium. If you have an excellent credit history that shows you always pay your bills on time, you may qualify for a lower PMI premium. Your loan type also determines how much you will be charged for your PMI. A fixed-rate mortgage or a short-term loan that carries less risk may have a lower PMI premium than an adjustable-rate mortgage or high-risk loan.
How do you calculate PMI? Generally, it is the loan amount times the percentage of your PMI rate. For example, if your PMI percentage rate is 0.5% and your loan amount is $400,000, the PMI premium is $400,000 X 0.5% = $2000 per year. Your monthly payment of PMI is $2000/12=$167.67. Most lenders will require PMI. However, there are some special cases. Sometimes lenders waive the PMI if the borrower has a very good credit history. They may charge an upfront fee or points as an additional cost instead of PMI. Fannie Mae or Freddie Mac often offer a smaller down payment of about 10% to 15% with no PMI requirement to help qualified home buyers obtain affordable mortgage loans.
For FHA loans, there is a mortgage insurance premium (MIP), not to be confused with PMI for conventional loans, which is required regardless of the down payment. The MIP includes two parts: an initial premium called the upfront mortgage insurance premium (UFMIP) and a monthly premium (MIP). Since 2015, the rate for up-front mortgage insurance has been 1.75% of the base loan price. FHA Streamline refinance loans are charged a UFMIP of 0.55%. You have the option to pay this amount in cash when you close your loan, but most people choose to roll it into their total mortgage amount. For loans made after January 1, 2001, MIP is automatically canceled when the LTV reaches 78% of the original value. However, financed MIP cannot be canceled. Certain low to moderate-income home buyers may be eligible for a loan with 100% financing in an approved house location area. USDA mortgage insurance rates are: for all loans 1% UFMIP paid at closing, based on the loan size. 0.35% annual fee (MIP) based on the remaining principal balance. VA loans help qualified veterans finance their homes with a 100% mortgage with no PMI and UFMIP, but borrowers must pay a non-refundable one-time variable funding fee for guaranteeing the loan.
Title Insurance includes homeowner's title insurance (HTI) and lender title insurance (LTI), which are totally different concepts from PMI and MIP. PMI and MIP protect the lender for the mortgage payment while title insurance protects homebuyers and lenders from financial losses resulting from defects in title to the property that is purchased or mortgaged. A title insurance policy promises to reimburse the policy holder for specified title defects. The homeowner's title insurance protects the property owner against losses arising from title defects such as forged documents, undisclosed heirs, misfiled documents, confusion arising from similar names, and defective transfers from mental incompetence. The seller typically pays the cost of the homeowner's title insurance which protects the buyer’s equity in the property up to the amount of the purchase price. The buyer pays the cost of the lender title insurance which protects the lender up to their current loan amount. Both types of title insurance protect from losses resulting from claims filed against the title, such as back taxes, liens, or conflicting wills, that were not disclosed in the title policy. The lender wants to make sure the title is clean. The title insurance charges for the homeowner's and lender policies are one-time fees paid to the title company at the closing to issue title policies certifying that the buyer owns the property and the lender has a first mortgage on the property, and the policies list the title exceptions affecting the property.
A clear title is necessary for any real estate transaction. Title companies must search the title records to make sure the seller owns the property they are selling and confirm any mortgages, taxes, or other liens that need to be paid to transfer a clear title to the buyer. The title policy also lists the covenants, restrictions, and easements that affect the property. A title search is an examination of public records to confirm the property’s legal ownership and to find out whether there are any claims against the property. Unlike traditional homeowner’s insurance, which protects against future events, title insurance protects against claims arising from past occurrences. Some transactions involve a warranty of title in addition to the title insurance. The warranty of title is a guarantee by a seller to a buyer that the seller has the right to transfer ownership and no one else has rights to the property. Generally, the seller pays for homeowners title insurance and provides a warranty of title in the deed. Almost all lenders require the borrower to purchase a lender’s title insurance policy to protect the lender in the event the seller was not legally able to transfer the title to the borrower. In most cases, the seller pays for the title insurance and chooses the title insurance underwriter. The cost of the homeowners’ title insurance ranges between $500-$3500, depending on the state in which you live and the price of the home. The higher the purchase price and loan amount, the higher the charge for the title insurance.
Often a lender’s policy and a homeowner’s hazard policy are both required to guarantee everyone is adequately protected. At closing, the parties purchase title insurance for a one-time fee. To prevent abuse, the Real Estate Settlement Procedures Act (RESPA) prohibits sellers and lenders from requiring the purchase of title insurance from a specific title insurance carrier. Your lender, attorney, or real estate agent can recommend a title insurance company to you. However, it is your responsibility to comparison shop the title and closing fees to get the best prices.
PMI, MPI, and homeowner's and lender title insurance are parts of the cost of purchasing a home. Finally, before closing, the buyer must also obtain a homeowner’s hazard insurance policy, which is totally different from the homeowner's title insurance. Be sure that you are not confused regarding the differences between homeowner's title insurance and homeowner’s hazard insurance. I have another article discussing homeowner’s hazard insurance on my blog that you may want to check out as well.
