What types of mortgage insurance policies are there?
Mortgage insurance policies and premium payments come in a few varieties, but most are monthly contracts. If you're given a choice, there can be monthly, annual or a one-time, life-of-loan single premium choice.
Annual policy: As the name suggests, annual plans are paid once per year. You will usually have to pay the first year’s premium when the loan closes; thereafter, the servicer will pay the premium once per year, but will usually break the premium into 12 installments and have you include them with your monthly mortgage payment.
Monthly policy: Monthly premiums are literally month-to-month policies. These may have a lower upfront cost but the regular premiums are a little bit higher than annual plans to cover the costs of recordkeeping and monthly fund transfers from your servicer to the insurer’s accounts.
Single-premium policy: If you want a single-premium policy, prepare to pay out as much as 3 percent to 5 percent of the loan amount at closing. This policy will remain in force until the loan reaches 78 percent or is refinanced; depending upon a choice when the policy is obtained, unused premiums may be refunded.
Other types of mortgage insurance
There are lesser-known alternatives to PMI you may encounter in the mortgage market.
Lender Paid Mortgage Insurance: With Lender Paid Mortgage Insurance (LPMI), for example, the lender folds the cost of the policy into a higher-than-market interest rate. Because your costs are included in the interest you pay, this tactic makes LPMI premiums always tax-deductible, while standard PMI premium costs have had an on-again, off-again tax-deductible status according to the whims of Congress. However, unlike a policy which is separate from the loan itself, LPMI is not cancelable; the only way to get out of it is to refinance or pay off the loan.
FHA: The FHA program is a unique package, too; borrowers commit funds into a self-insuring pool to offset costs associated with other borrower's defaults. While the FHA version is more like an annual-premium policy, paid at the time of closing, the upfront cost can be financed into the loan amount (which makes it tax-deductible, like LPMI).
FHA's MI premium structure is pretty straightforward. At closing, the borrower pays a fee equivalent to 1.75 percent of the loan amount (and this fee is usually added to the loan amount). Depending upon the size of the loan and the amount of the borrower’s initial stake, borrowers with 30-year terms will see annual premiums of 1.3 percent to 1.55 percent of the outstanding balance; loans with 15-year terms will have annual premiums ranging from 0.45 percent to 0.95 percent of the loan amount.
A $100,000 mortgage made to a borrower with just 5 percent down would see a $1,750 upfront cost, followed by annual premiums of about $100 per month (declining over time as the loan balance shrinks).
Like other MI insurers, the FHA was stung by losses in the downturn and continues to make changes to ensure solvency, which is required by law. Increases in up-front and annual premiums have been put in place.
As far as cancellation goes, the rules change frequently, and the ability to cancel your FHA MI has come and gone. Of late, it’s gone again, at least for most borrowers; A new rule in April 2013 again required loans with an initial down payment (or equity stake) of less than 10 percent to carry MI for the entire term of the loan, so it cannot be cancelled except by refinancing to another loan. Loans with larger down payments or equity stakes (refinance) will see their policies in place for a minimum of 11 years.