PMI, MPI, Confused yet?
When it comes to Insurance associated with your home purchase, first-time buyers (already overwhelmed with the real estate and mortgage process) are further confused by terms like PMI, MPI, MI, title, etc. Adding to the confusion is the question of which type of insurance a lender may require versus which may be optional. The following information will help first-time home buyers gain a better understanding of the products and their costs.
Homeowners Insurance, often referred to as Hazard or Property insurance, is coverage to protect your home in the event of a loss. Most standard coverage includes dwelling, other structures, personal property, loss of use, liability, and medical payments to others.
It is important to consider whether to insure your home and its contents for replacement cost or actual value. Replacement Cost is the cost to rebuild your home or repair damages using materials of similar kind and quality. Actual Cash Value is the value of your home considering its age and wear and tear. Actual Cash Value coverage pays you for your loss, but often doesn't pay enough to fully repair or replace the damage. The average cost in 2011 for a policy in Connecticut was $1016.
As a condition of closing, lenders typically will require you to secure a policy equivalent to the loan amount or replacement cost and require proof of such in the form of a binder. For more information, download A Consumer’s Guide to Home Insurance.
Mortgage Insurance is an insurance policy for the lender in the event of a default on the mortgage. You may hear it referred to as PMI (Private Mortgage Insurance, for Conventional loans) or MIP (Mortgage Insurance Premium, for the government-insured FHA loans). Government loans ALWAYS have mortgage insurance; there is no way to get around it. On a $200,000 FHA purchase with 3.5% down payment, you will pay about $200 a month for the FHA MIP.
Conventional loans with less than 20% equity (or down payment) require PMI. PMI premiums vary based on down payment and credit score and are typically paid monthly as part of your mortgage payment. On a $200,000 Conventional purchase with 5% down payment, you will pay about $160 a month for PMI.
For the most credit worthy borrowers some lenders offer ways to avoid the monthly PMI with as little as 5%-10% down. This is a nice option because unlike mortgage interest which is tax deductible, mortgage insurance has no tax advantage.
VA loans have a one time funding fee of 1.4% - 3.3% based on the loan amount. Rural Development (USDA) loans require a one-time fee of 3.5% and a monthly premium.
Title Insurance: A “title” is the legal document that establishes ownership in real estate or personal property (i.e. an automobile). If you own your car outright (in other words you do not have an auto loan), you have the title to your car. Similarly the owner of a home is listed on the title, as well as any other entity with an interest in the property (for example, the lender who holds the mortgage). Title insurance is an insurance policy to protect against a financial loss due to title-related issues. It protects the policy holder against things such as: improperly recorded (or unrecorded) mortgage releases or tax liens from prior home owners; fraud such as forged deeds, fabricated or expired powers of attorney; undisclosed heirs (who could claim interest in the property years later); and inaccurate property descriptions.
There are two title policies relevant to every purchase: one for the owner and one for the lender. Lender’s title insurance is always required and your attorney will likely recommend that you purchase the owner’s policy. The policy premium is paid only once, at closing. The approximate cost of a lender’s title insurance policy on a $200,000 purchase price with minimal down is $740; the owner’s policy is about $85. For more information about Title Insurance click here and access the resources guide.
Mortgage Protection Insurance (MPI), (mortgage life insurance) is designed specifically to repay the mortgage balance upon the death of the borrower. MPI is normally offered after closing through your lender but can be purchased through any company. Normally a fixed monthly premium can be added to your mortgage payment for coverage that decreases as your mortgage balance is reduced. Mortgage Protection Insurance is not required by lenders. Average costs can vary but premium estimates are about one half of 1% of the mortgage annually.
Many financial experts indicate that there are better insurance options available than purchasing MPI through your lender, so talk to your financial advisor to determine the best option for your needs.
If you are thinking about buying a home give us a call at (860) 221-5314 or for more information about financing your purchase send us an email to explore your options.