As you begin shopping for a new home, you will most likely need to get a loan in order to buy the house you choose. Getting a mortgage loan is typically needed by people who purchase homes, and your lender will help you find the right loan type for your needs and situation. When you get the loan information, you should evaluate you it closely to see if you will be required to pay mortgage insurance premiums (MIP) or private mortgage insurance (PMI). Here is an explanation of what these fees are and the differences between them.
What is MIP?
MIP is a fee lenders charge when they issue FHA loans, which are loans backed by the Federal Housing Administration. MIP is insurance protection you pay for, yet it doesn't really offer you any protection. Instead, it protects the lender that issues the loan. If you default, the FHA will pay your loan, which means the lender will not lose any money.
MIP is a two-part fee, which includes a fee upfront when you get the loan, and a monthly fee for as long as you have the loan. The amount you will pay upfront is 1.75% of the loan amount. For example, if the loan is for $150,000, the fee will be $2,625, and this can be included in the loan amount. Each month you will also pay a fee for the MIP, and this amount is usually 0.85% of the loan amount. You will have to pay this every month until the loan is paid off.
What is PMI?
PMI is a fee lenders charge with conventional loans, and it is also a form of mortgage insurance that protects the lender. If you default, the company that sold you the PMI will pay your lender for your loan so the lender does not lose out on the money. There is no upfront fee for PMI, but there is a monthly charge, and this is usually between 0.5% to 1% of the loan amount. Lenders only charge PMI if people borrow more than 80% of a home's value.
How to avoid paying these fees
If you want to keep your mortgage payments as low as possible, you may want to find out if there is a way to avoid paying MIP or PMI with the loan you will be using. To avoid paying MIP, you will need to choose a loan that is not an FHA loan. To avoid paying PMI, you will need to make sure you borrow less than 80% of the value of the house you are buying.
Getting a loan is something you will need to do if you want to buy a house, but it can be a confusing process if you have never had a mortgage loan before. To learn more about the various loan packages you might qualify for, contact a mortgage lender today. For more information, contact companies like Liberty Escrow Inc.