If you’re in the process of buying a home, you’ve probably heard the term “mortgage insurance” tossed around. But what is it, and how does it work? In this article, we’ll explore the ins and outs of mortgage insurance, so you can make an informed decision when it comes to your home purchase.
What is Mortgage Insurance?
Mortgage insurance is a type of insurance that protects lenders in case a borrower defaults on their mortgage. If you’re putting less than 20% down on a home, most lenders will require you to purchase mortgage insurance. The insurance premium is typically added to your monthly mortgage payment.
There are two main types of mortgage insurance: private mortgage insurance (PMI) and government mortgage insurance. PMI is provided by private insurance companies, while government mortgage insurance is provided by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), and the Department of Agriculture (USDA).
PMI vs. Government Mortgage Insurance
PMI is typically required for conventional loans, while government mortgage insurance is required for FHA, VA, and USDA loans. PMI premiums vary depending on the size of your down payment and your credit score. Government mortgage insurance premiums are set by the government and are generally higher than PMI premiums.
One advantage of government mortgage insurance is that it can be easier to qualify for than PMI. For example, FHA loans allow borrowers with credit scores as low as 500 to qualify, while conventional loans typically require a credit score of at least 620.
How Mortgage Insurance Benefits Lenders
Mortgage insurance benefits lenders because it reduces their risk of financial loss if a borrower defaults on their mortgage. If you default on your mortgage, your lender can file a claim with the mortgage insurance company to recoup their losses. This is why lenders require mortgage insurance for borrowers who are putting less than 20% down on a home.
How Mortgage Insurance Benefits Borrowers
While mortgage insurance may seem like an added expense for borrowers, it can actually be beneficial in some cases. For example, if you’re not able to save up a 20% down payment, mortgage insurance can make homeownership more accessible by allowing you to put down a smaller down payment. Additionally, some lenders may offer lower interest rates to borrowers who purchase mortgage insurance.
How to Cancel Mortgage Insurance
Once you reach 20% equity in your home (either through paying down your mortgage or appreciation in the value of your home), you can request to cancel your mortgage insurance. For government mortgage insurance, you’ll need to refinance your loan to remove the insurance. For PMI, you can request to have it removed once you reach 20% equity and have a good payment history.
In conclusion, mortgage insurance is an important consideration for anyone buying a home. It can make homeownership more accessible, but it’s important to understand the costs and benefits before making a decision. If you’re unsure about whether mortgage insurance is right for you, speak with a trusted lender or financial advisor.