One of the benefits of owning a condo is affordability, but you could run into a lender who wants you to pay a mortgage insurance premium (MIP). Lenders typically charge an MIP when you put less than 20 percent down on the condo or refinance with minimal equity. The MIP increases your mortgage payment for several years. It protects your lender against default, and can usually be canceled after you make a certain amount of payments.
Lenders finance condos in complexes with financial stability. They like mortgage insurance because it means condo owners have a shared ownership interest in a complex. Too many foreclosures, or homeowners lagging in association dues, make financing a condo risky business. Financial instability in a complex may increase your chance of default and prevents the lender from recouping its losses if it forecloses and has to sell the condo. When you pay the MIP, your lender is guaranteed reimbursement by the mortgage insurance company if you foreclose.
You have to send the monthly installment for the MIP along with your loan payment to keep the mortgage in good standing. The annual MIP on a condo is typically charged at the same rate as other housing types, like detached homes. Insurance providers and lenders have been known to discontinue coverage on condo financing or increase premium costs because of market volatility. In a difficult housing market, these policy changes make financing a condo difficult, if not impossible, for borrowers of modest means.
Depending on your initial MIP agreement with your lender, you may be able to eliminate the MIP on your condo loan. Paying down the loan to 78 percent of its original balance is usually sufficient assurance that you won't default. Lenders automatically cancel, or are open to a cancellation request, once you've repaid at least 20 percent. This generally takes several years if you pay principal and interest each month. Some loans, like those backed by the Federal Housing Administration (FHA), require you pay down the loan and make on-time payments for at least five years before cancelling the MIP.
Having to pay the MIP on your loan increases the monthly cost of owning a condo, but it also means you pay less up front. Because it directly benefits your lender, and not you, making a large down payment to avoid mortgage insurance may be a good choice if you have the cash to do it. You'll also have equity sooner, which means you can refinance or sell the condo more easily. The benefit for you is the MIP may allow you to buy sooner because you won't have to save for a hefty down payment.
- HUD: Terminology Used with Single Family Upfront Mortgage Insurance Premium (MIP)
- HUD: Handbook 4155.2: Annual Mortgage Insurance Premiums (MIP)
- New York Times: Mortgage Insurance: Harder to Get
- Bankrate: How to Jump Through Condo Loan Hoops
- New York Times: Collateral Foreclosure Damage for Condo Owners
- HUD: Handbook 4155.2: Chapter 7: Annual Mortgage Insurance Premiums (p. 7-12)
- HSH: How Mortgage Insurance Works
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