Mortgage insurance is a type of insurance policy that protects the lender in case the borrower defaults on their mortgage payments. It is often required by lenders when a borrower puts down less than 20% of the home’s purchase price. Mortgage insurance can be paid upfront or monthly, and it can increase the cost of the loan.
There are different types of mortgage insurance, such as private mortgage insurance (PMI), which is required for conventional loans, and mortgage insurance premium (MIP), which is required for FHA loans. The cost and other details of mortgage insurance vary by the type of loan. It is important to understand the basics of mortgage insurance before applying for a loan, as it can significantly affect the total cost of the loan.
Key Takeaways
- Mortgage insurance protects the lender if the borrower defaults on their mortgage payments.
- Different types of mortgage insurance include PMI and MIP, which can increase the cost of the loan.
- Borrowers should understand the basics of mortgage insurance before applying for a loan to make informed decisions about their mortgage options.
Basics of Mortgage Insurance
Mortgage insurance is an insurance policy that protects the lender in case the borrower defaults on their mortgage. It is typically required when the borrower makes a down payment of less than 20% of the purchase price of the home. The purpose of mortgage insurance is to lower the risk to the lender of making a loan to the borrower, so they can qualify for a loan that they might not otherwise be able to get.
There are two types of mortgage insurance: private mortgage insurance (PMI) and government mortgage insurance. PMI is provided by private companies and is required for conventional loans. Government mortgage insurance is required for FHA loans and VA loans.
The cost of mortgage insurance varies depending on the size of the down payment and the type of mortgage insurance. For borrower-paid monthly private mortgage insurance, annual premiums from one of the country’s largest mortgage insurance providers, MGIC, range from 0.17% to 1.86% of the loan amount, or $170 to $1,860 per year for every $100,000 borrowed.
It is important to note that mortgage insurance is not the same as homeowners insurance. Homeowners insurance protects the borrower in case of damage to the property, while mortgage insurance protects the lender in case of default by the borrower.
Types of Mortgage Insurance
Mortgage insurance is a financial product that is designed to protect the lender in case the borrower defaults on the loan. There are several types of mortgage insurance, each with its own set of rules and requirements.
Private Mortgage Insurance (PMI)
Private mortgage insurance (PMI) is a type of mortgage insurance that is required for homebuyers who put down less than 20% of the purchase price of their home. PMI is typically rolled into the monthly mortgage payment and can cost between 0.5% and 1% of the loan amount per year [1]. This translates to $1,000 to $2,000 per year in mortgage insurance for the average U.S. homeowner who is required to carry PMI.
FHA Mortgage Insurance Premium (MIP)
FHA mortgage insurance premium (MIP) is a type of mortgage insurance that is required for homebuyers who obtain an FHA loan. This insurance protects the lender in case the borrower defaults on the loan. The cost of MIP varies depending on the size of the down payment and the loan amount. For borrowers who put down less than 10% of the purchase price of their home, the MIP is required for the life of the loan. For borrowers who put down 10% or more, the MIP is required for 11 years [2].
USDA Loan Insurance
USDA loan insurance is a type of mortgage insurance that is required for homebuyers who obtain a USDA loan. This insurance protects the lender in case the borrower defaults on the loan. The cost of USDA loan insurance varies depending on the size of the down payment and the loan amount. For borrowers who put down less than 20% of the purchase price of their home, the USDA loan insurance is required for the life of the loan [3].
VA Funding Fee
VA funding fee is a type of mortgage insurance that is required for homebuyers who obtain a VA loan. This insurance protects the lender in case the borrower defaults on the loan. The cost of the VA funding fee varies depending on the size of the down payment and the loan amount. For borrowers who put down less than 5% of the purchase price of their home, the VA funding fee is required for the life of the loan. For borrowers who put down 5% or more, the VA funding fee is required for 10 years [4].
In summary, mortgage insurance is a financial product that is designed to protect the lender in case the borrower defaults on the loan. There are several types of mortgage insurance, each with its own set of rules and requirements. Homebuyers should carefully consider the cost of mortgage insurance when deciding how much to put down on their home.
Benefits and Drawbacks
Lender Protection
Mortgage insurance provides protection to lenders in the event that borrowers default on their mortgages. This means that if a borrower is unable to make their mortgage payments, the lender will still receive payments from the insurance company. This protection gives lenders peace of mind when lending money to borrowers who may be considered high risk.
Borrower Advantages
Mortgage insurance can also provide benefits to borrowers. For example, it can make it easier for borrowers to obtain a mortgage, as lenders may be more willing to lend money to borrowers who have mortgage insurance. Additionally, mortgage insurance can help borrowers protect their families in the event of their death. If a borrower with mortgage insurance dies, the insurance will pay off the remaining balance of the mortgage, preventing the borrower’s family from having to take on the debt.
Potential Disadvantages
While mortgage insurance can provide benefits to both lenders and borrowers, there are also potential drawbacks to consider. For example, mortgage insurance can be expensive, and the cost is typically added to the borrower’s monthly mortgage payment. Additionally, mortgage insurance may not provide as much protection as other types of insurance, such as term life insurance. Finally, mortgage insurance may only provide protection for a limited period of time, and may not cover certain types of events, such as job loss or disability.
Overall, while mortgage insurance can provide benefits to both lenders and borrowers, it is important to carefully consider the potential drawbacks before deciding whether to purchase this type of insurance.
Mortgage Insurance Costs
Mortgage insurance is an additional cost that borrowers need to pay when they take out a mortgage loan. The cost of mortgage insurance can vary depending on a variety of factors, including the type of mortgage, the size of the down payment, and the borrower’s credit score.
Determining Factors
The two main types of mortgage insurance are private mortgage insurance (PMI) and mortgage insurance premium (MIP). PMI is required for conventional loans with a down payment of less than 20%, while MIP is required for FHA loans.
The cost of PMI can vary depending on factors such as the size of the down payment, the loan term, and the borrower’s credit score. According to SmartAsset, the average range for PMI rates is 0.5% to 1.86% of the loan’s original amount.
MIP rates for FHA loans are determined by the loan amount, the loan term, and the size of the down payment. According to Forbes, MIP rates for most FHA loans range from 0.45% to 1.05% of the loan amount per year.
Payment Methods
Borrowers have different options for paying for mortgage insurance. For PMI, borrowers can choose to pay the premium as a lump sum at closing, as a monthly premium added to their mortgage payment, or a combination of both.
For MIP, borrowers are required to pay an upfront premium at closing, which can be financed into the loan, as well as a monthly premium added to their mortgage payment.
It’s important for borrowers to consider the cost of mortgage insurance when deciding on a mortgage loan. While a smaller down payment may be more affordable upfront, it can result in higher monthly payments due to the cost of mortgage insurance. Borrowers should weigh their options carefully and consult with a mortgage professional to determine the best course of action for their financial situation.
Mortgage Insurance Cancellation
Mortgage insurance protects the lender in case the borrower defaults on the loan. Once the borrower has enough equity in the home, they may be able to cancel the mortgage insurance. There are two ways to cancel mortgage insurance: automatic termination and borrower-requested cancellation.
Automatic Termination
For loans originated after July 29, 1999, mortgage insurance must be automatically terminated by the lender once the borrower reaches 22% equity in the home, based on the original property value. If the borrower has made additional payments towards the principal balance of the loan, they may reach 22% equity sooner than expected.
For loans originated before July 29, 1999, the lender is not required to automatically terminate mortgage insurance. The borrower must request cancellation of the mortgage insurance once they reach 20% equity in the home, based on the original property value.
Borrower-Requested Cancellation
Borrowers can request cancellation of mortgage insurance once they reach 20% equity in the home, based on the original property value. The borrower must have a good payment history and the lender may require an appraisal to confirm the property value.
It’s important to note that for FHA loans, mortgage insurance is required for the life of the loan. The only way to remove mortgage insurance on an FHA loan is to refinance the loan into a conventional mortgage once the borrower has enough equity in the home.
Borrowers should contact their lender to determine the specific requirements for canceling mortgage insurance on their loan.
