What is Mortgage Insurance?

  • February 12, 2015

When you apply for a mortgage, your lender may require you to pay “mortgage insurance.” What is it, how does it work, and why do you need to pay it?
 
Mortgage insurance defined.
 
Mortgage insurance is a premium that can be added to your monthly mortgage payment, just like property taxes or homeowner’s insurance (some lenders allow you to make one lump-sum payment annually).
 
If your down payment will be less than 20% of your home’s purchase price, some lenders require mortgage insurance to protect their investment in case you can no longer make your monthly payments. If you default on your mortgage, the lender will be paid via the mortgage insurance policy.
 
What’s the advantage of mortgage insurance?
 
Mortgage insurance empowers you to buy a home with less than 20% down. For many people, mortgage insurance makes home ownership possible.
 
Are there different types of mortgage insurance?
 
Yes, depending on the type of mortgage you are obtaining. If it’s a VHA or VA loan, you’ll have government mortgage insurance. For other loans, you’ll have “private mortgage insurance” or “PMI.”
 
How much are mortgage insurance premiums?
 
Typically, private mortgage insurance premiums are based on the size of your down payment and credit score. The lower they are, the higher your premiums. FHA loans require an upfront premium payment, then monthly payments afterwards. VA loans have an upfront premium, without any additional payments required. Ask your lender for details about how your premiums will be calculated.
 
When does the mortgage insurance requirement end?
 
Once you’ve built up 20% or more equity in your home, then you may qualify to “drop” your mortgage insurance. (“Equity” is the amount your home is worth, less the amount you still owe on it.)
 
Can I avoid paying mortgage insurance from day one?
 
Typically, the only way is to make at least a 20% down payment on a conventional (not FHA or VA) loan.

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