What is Mortgage Insurance?

What is Mortgage Insurance?

Mortgage insurance is an insurance that protects the mortgage lender if the borrower fails to make payments. It helps the lender get their money back right because they want to be paid from the loan that they gave out. If you must pay mortgage insurance, it will be included in your total monthly payment to your lender. Mortgage insurance can refer to private mortgage insurance (PMI), mortgage insurance premium (MIP) insurance, or mortgage title insurance.  

How It Works 

Mortgage insurance is required when the borrowers making a down payment of less than 20% of the purchase price of a home. However, if you’re able to put at least 20% down, you can avoid mortgage insurance.  

How Does It Differ Between Loan Programs?

Conventional loan borrowers with lower down payments must pay private mortgage insurance (PMI), whereas Federal Housing Administration (FHA) loan borrowers must pay a mortgage insurance premium (MIP). Some programs require no insurance but require fee.

Loans and Insurances:

PMI For Conventional Mortgages

Your lender may arrange for mortgage insurance with a private company. Conventional loans with the down payment of less than 20% (low as 3%) carry private mortgage insurance (PMI). Rates vary by down payment amount and credit score. It can be paid either monthly or upfront as a single premium. But rates are generally lower than FHA rates for borrowers with good credit. You may be able to cancel your PMI under certain conditions.

MIP For FHA Loans

With an FHA loan, the borrower has to pay an insurance premium. The reason behind is that the prospective home buyer is deemed a higher risk, due to lower income and a lower credit score. A mortgage broker, such as Hawk Mortgage Group is able to shop for the best mortgage interest rates to fulfill your needs. FHA borrowers are required to pay two mortgage insurance premiums: upfront and another annually. Actually, when paying at least 20 percent down payment, this requirement can often be avoided altogether. 

US Department of Agriculture (USDA) guarantee fee

USDA loans require no down payment for rural home buyers. It doesn’t technically require mortgage insurance but they require guarantee fee. This comes as upfront fee and annual fee. The upfront premium is financed into the loan and borrowers pay the monthly premium as part of their mortgage payment.

VA funding fee

For active, disabled, or retired military service members, certain National Guard members and reservists, and eligible surviving spouses, VA mortgages require no down payment and offer low interest rates. There is no mortgage insurance. However, you may pay a funding fee which is one-time payment but under some circumstances you may avoid it. 

How To Avoid

To get rid of FHA mortgage insurance, you must refinance to a conventional loan. You’ll need a 620 credit score and 20% equity to get rid of your FHA mortgage insurance premium. Once you build up at least 20 percent equity in your home, you can ask your lender to cancel this insurance. 

To avoid PMI, there are four options. Refinance, get Lender-Paid Mortgage Insurance, get Piggy-back Loan Mortgage, try Va Loan or for conventional loans, once you’ve reached 20% equity in your home you can request to stop paying it. PMI is often cancelled automatically once you’ve reached 22% equity. 

If you are entitled to or are receiving compensation for a service-connected disability, a surviving spouse of a veteran who died while serving or from a service-connected disability, an active-duty service member who has received a Purple Heart you may get rid of it.