Below are some of the terms you’ll be running into most often. For a more complete list, you can always head to americanmortgagecorporation.com for a breakdown of even more mortgage terms.
Private Mortgage Insurance (PMI) and Mortgage Insurance Premium (MIP) play pretty much the same position within the mortgage arena. PMI is provided by private mortgage insurance companies, while MIP is provided through the U.S. government’s Federal Housing Authority (FHA). Both are required for borrowers with low down payments and offer protection to the lender in the event of default. Mortgage insurance protects the lender in the event the value of the home falls short of the outstanding debt.
If you’re putting less than 20% down this insurance is meant to protect the lender if a borrower defaults on a home loan.
Fees for PMI vary and depend on the size of your down payment or equity as well as your credit score. Fees for PMI are either paid upfront or as part your monthly payment. Most lenders will automatically remove your PMI once the value of your property is greater than 78% of your home’s original value based off your original amortization schedule. Talk to your lender, there are situations where this may be done sooner. In a rising housing environment this can be an option.
FHA mortgages require MIP. MIP offers the same type of protection to the FHA that PMI provides to non-FHA lenders. Fees for MIP are determined by the loan amount and loan-to-value ratio. They can be paid up front in a lump sum or as part of the monthly mortgage payment.