Mortgage insurance is a specialized protection for the lender -not the buyer- in the event that you are
unable to make your mortgage payments, for any reason. If you fall behind, your credit score may suffer,
and you could stand to foreclose on your home.
Who needs Mortgage Insurance?
Typically, borrowers making a down payment of less than 20 % of the purchase price of the home also
will need to pay for mortgage insurance. This insurance is also usually required on FHA and USDA loans.
How does it work?
Mortgage insurance lowers the risk to the lender making the loan to you, that way you are eligible for a
loan you might not otherwise get. This does increase the cost of the overall loan but if you are required
to get it, it will either be included in your monthly payment, your costs at closing, or both.
Are there different ways to pay for mortgage insurance?
There are several different kinds of loans available to borrowers who have low down payments, and the
resulting mortgage insurance can be paid for in a number of ways.
If you have a conventional loan, your lender may arrange for a private company to insure you. Private
mortgage insurance (PMI) rates vary by down payment amount and credit score but are generally
cheaper than FHA rates for those with good credit. Under certain circumstances, you may be able to
cancel your PMI.
If you have an FHA loan, premiums from your insurance are paid to the Federal Housing Administration.
This type of insurance is required on all FHA loans. FHA insurance is paid by both monthly payments and
upfront costs that are included in closing. Loan amounts can increase if there is not enough cash on hand to pay upfront and the fee is rolled over to the mortgage.
If you have a USDA loan it is similar to the FHA but typically cheaper. You will pay for insurance both
upfront and monthly. You may choose to roll the upfront portion to the mortgage but again, this will
increase overall loan cost.
VA Backed – replaces mortgage insurance and functions similarly to it. There is no monthly premium
with this loan but there is an upfront “funding fee”, which varies depending on the type of military
service, the down payment amount, disability status, type of loan (buying or refinancing), and whether
or not it is a first VA loan. You have the choice to roll the upfront fee with this as well.
Once you pay off some of your loan, you may be eligible to cancel mortgage insurance.
