Can I Shop for Mortgage Insurance?

Mortgage insurance protects lenders from losses if a borrower defaults on their home loan. It is typically required when a homebuyer makes a down payment of less than 20%. While borrowers cannot directly “shop” for mortgage insurance from an insurer, they can manage its cost through lender selection and loan structure.

Understanding Mortgage Insurance

Mortgage insurance safeguards the lender, not the borrower. If a borrower cannot meet mortgage obligations, it compensates the lender for financial losses. Lenders require mortgage insurance to mitigate risk for loans with less borrower equity. This enables lenders to approve loans that might otherwise be too risky, allowing more individuals to achieve homeownership with a lower upfront investment.

Two primary types of mortgage insurance exist, distinguished by loan type. Private Mortgage Insurance (PMI) is for conventional loans, not backed by a government agency. Private companies issue PMI, typically required when the down payment is less than 20% of the home’s value.

Federal Housing Administration (FHA) loans require a Mortgage Insurance Premium (MIP). The FHA administers this premium, which applies to all FHA loans regardless of down payment. Unlike PMI, FHA MIP includes an upfront premium (paid at closing or financed) and an annual premium paid monthly.

VA loans for eligible veterans and service members do not require ongoing mortgage insurance. Instead, most VA loans involve a one-time VA funding fee. This fee helps offset program costs and can be paid upfront or rolled into the loan.

Shopping for Mortgage Insurance

Borrowers cannot directly shop for mortgage insurance from an insurance provider. The mortgage lender selects the mortgage insurance company, as it protects their financial interest. However, “shopping” for mortgage insurance involves comparing lenders and their options for integrating this cost into your loan. This allows borrowers to find the most suitable and cost-effective arrangement.

One common approach is to compare Borrower-Paid Mortgage Insurance (BPMI) options. The most frequent form of BPMI is a monthly premium, included with your regular mortgage payment. This monthly payment ranges from 0.5% to 1% of the loan amount annually.

Borrowers can also opt for a single-premium BPMI, a one-time lump sum payment at closing. This upfront payment covers the entire mortgage insurance cost for the life of the loan, potentially offering long-term savings. A third BPMI option is split-premium mortgage insurance, combining an upfront payment at closing with reduced monthly payments. This hybrid approach provides flexibility, requiring less cash upfront than a single premium while lowering recurring monthly expenses. The upfront portion often ranges from 0.50% to 1.25% of the loan amount, with the monthly premium adjusted accordingly. Evaluating these BPMI structures across different lenders, alongside their interest rates, helps identify the most advantageous loan package.

Another consideration is Lender-Paid Mortgage Insurance (LPMI). With LPMI, the lender pays the mortgage insurance premium, but the borrower accepts a slightly higher interest rate. This arrangement eliminates a separate monthly mortgage insurance payment, which can result in a lower monthly housing expense. However, the higher interest rate associated with LPMI remains for the entire life of the loan, unlike BPMI which can be canceled. Borrowers should calculate the total cost over their expected loan term to determine if LPMI offers a financial advantage.

For FHA loans, the Mortgage Insurance Premium (MIP) is not “shoppable” like PMI. FHA MIP rates, including upfront and annual premiums, are set by the Federal Housing Administration and are uniform across all FHA-approved lenders. Therefore, “shopping” for an FHA loan involves comparing lenders based on interest rates, closing costs, and service. The upfront MIP is 1.75% of the loan amount, and annual MIP rates vary based on loan amount and loan-to-value ratio.

Canceling Mortgage Insurance

The ability to cancel mortgage insurance depends on the loan type and specific product. For conventional loans with Private Mortgage Insurance (PMI), federal law, the Homeowners Protection Act (HPA) of 1998, provides guidelines for cancellation. Under the HPA, PMI automatically terminates when the loan’s principal balance is scheduled to reach 78% of the home’s original value, provided the loan is current. This automatic termination occurs based on the initial amortization schedule, regardless of actual payments made.

Borrowers can also request PMI cancellation once their loan’s principal balance reaches 80% of the home’s original value. To initiate cancellation, the borrower must submit a written request to their mortgage servicer. Lenders require a good payment history (no 30-day late payments in the past 12 months or 60-day late payments in the past 24 months) and may require an appraisal to confirm the property’s value has not declined.

Refinancing the mortgage can also eliminate PMI. If a borrower refinances into a new conventional loan with at least 20% equity based on current appraised value, PMI will not be required. This strategy is effective if home values have appreciated or if the borrower has made substantial additional principal payments. Paying down the principal balance faster, through extra payments or a lump sum, accelerates the loan-to-value (LTV) ratio reaching the 80% or 78% thresholds, speeding up PMI cancellation.

For FHA Mortgage Insurance Premium (MIP), cancellation rules differ from PMI. For most FHA loans originated after June 3, 2013, MIP lasts for the entire life of the loan. The only exception is if the borrower made an original down payment of at least 10% when securing the FHA loan, in which case the annual MIP can be removed after 11 years. If an FHA loan does not meet criteria for automatic MIP removal, the primary method to eliminate the premium is to refinance into a conventional loan. This requires the homeowner to have accumulated at least 20% equity to avoid triggering PMI on the new conventional loan. While refinancing can be an effective way to remove FHA MIP, borrowers should consider closing costs and compare them to remaining MIP payments to determine the financial benefit.