Are you curious to know what is mortgage insurance? We got you covered.
In some cases, the process of buying a home involves taking out a mortgage and making the payment.
However, if your payment is less than 20% of your home’s purchase price or you’re taking out a particular mortgage like an FHA loan, you might also need to buy mortgage insurance.
For lenders, these are high-risk lending situations, so they require mortgage insurance to protect their interests.
READ MORE: What is mortgage insurance and how does it work?
What Is Mortgage Insurance?
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Mortgage insurance is an insurance policy that protects the mortgage lender and is paid for by the borrower. Moreover, with mortgage insurance, the lender is covered in case you are unable to pay back the mortgage for the reason.
It can include defaulting on payments, failure of contractual obligations, passing away or any other number of situations that prevent the mortgage from being completely repaid.
How Mortgage Insurance Works
Generally, you’ll need to pay for mortgage insurance if you pay less than 20% on a home purchase. This is because you have less invested in the home upfront, so the lender has taken a risk in giving you a mortgage. So the amount of your payment depends on the type of loan you have and other factors.
Pros of This Insurance
- You can easily buy a home at a low rate. Maybe you don’t have sufficient savings of 20% payment, you might qualify for the conventional mortgage with a small payment.
- You have more options. You can choose from a wide range of homes when you consider different combinations of mortgage types, amounts and insurance requirements.
- PMI will get automatically removed. The conventional mortgage PMI will be removed immediately when your mortgage principal balance is scheduled to be 78% of your home’s original value.
Cons of This Insurance
- It requires high upfront costs. You will have to pay part of the insurance upfront, which can increase your closing costs. However, you can add these upfront fees to your mortgage rather than paying in cash.
- You will have to increase payments monthly. The monthly mortgage insurance premium will increase your housing costs monthly.
- It can stick for the life of the loan. With government-backed loans, you’ll have to refinance if you want to get rid of the mortgage insurance payments.
READ MORE: What is mortgage insurance?
Types of Mortgage Insurance
Various types of mortgage insurance and similar insurance-like programs vary depending on the type of mortgage. Here’s a type of mortgage insurance we have.
1. Private Mortgage Insurance (PMI)
Generally, you will pay for mortgage insurance when you get a conventional mortgage(non-government-backed mortgage) and put less than 20%. For instance, with the $400,000 mortgage, you will have to pay for mortgage insurance if your down payment is less than $80,000.
On conventional loans, mortgage insurance is called private mortgage insurance (PMI), and borrowers often pay the monthly premiums as part of their mortgage payments. However, you may be able to make a single upfront payment or split the cost between upfront and monthly payments.
2. Federal Housing Authority (FHA) Mortgage Insurance
Federal Housing Authority (FHA) mortgages are backed by the FHA and offered by certain lenders. There are several types of FHA loans and these can be a good option when you have only small payments or don’t have good enough credit to qualify for conventional loans. FHA loans have a mortgage insurance premium (MIP) that you’ll pay for with an upfront fee and monthly payments.
3. U.S. Department of Agriculture (USDA) Guarantee Fees
U.S. Department of Agriculture (USDA) home loans don’t ask for down payments and can help buyers who have low income or credit purchase a home in certain suburban and rural areas.
USDA loans don’t technically have mortgage insurance but you have to pay upfront and the annual fees which are essential to serve the same purpose. You can roll the upfront portion into your mortgage if you’d prefer.
4. Department of Veterans Affairs (VA) Loan Funding Fees
U.S. Department of Veterans Affairs (VA) home loans don’t ask for a down payment and don’t have mortgage insurance. However, you will pay one time to find a few, which you can choose to roll into your mortgage.
The Cost of The Insurance
How high is your down payment the lower your mortgage insurance premium will be.
With private mortgage insurance (PMI) on the conventional loan, you will pay 0.58% to 1.86% of the original amount of your loan. That equates to $58 to $186 monthly for every $100,000 borrowed.
If you have an FHA loan, your upfront premium is 1.75% of your loan amount, for the annual premium ranges between 0.45% and 1.05%. Moreover, for a loan of $350,000, your upfront MIP premium will be $6,125 and your annual premium would fall between $1,575 and $3,675 ( paid monthly with your mortgage).
USDA loans come with a 1% upfront guarantee fee, as well as an annual fee that’s equal to 0.35% of your loan. For example, that will come out to $3,500 upfront and $1,225 annually.
For VA loans, the funding fee ranges from 1.25% to 3.3% depending on the amount of your down payment and whether or not you’ve taken out a VA loan before. This comes out to $4,375 to $11,550 for a $350,000 loan.
READ MORE: Mortgage Insurance Options For Borrowers With Student Loans
Conclusion
Now that you know what is mortgage insurance, you can apply to any of the insurance companies that suit you.
