Purchasing a home is one of the most significant investments you will ever make in your lifetime. It’s an exciting but also daunting experience, especially for first-time homebuyers who may not be familiar with the jargon associated with the home buying process. One term that may come up during the process is mortgage insurance. In this article, we will explain what mortgage insurance is, the different types of mortgage insurance, and how it affects your overall mortgage payments.
What is Mortgage Insurance?
Mortgage insurance is a financial product that protects lenders against losses due to borrower default on mortgage loans. Essentially, it is an insurance policy that covers the lender in case the borrower is unable to make their mortgage payments. Typically, mortgage insurance is required when a borrower puts down less than 20% of the home’s purchase price. The purpose of this insurance is to mitigate the risk for lenders when lending money to borrowers who may have limited funds for a down payment.
Types of Mortgage Insurance
There are two types of mortgage insurance: private mortgage insurance (PMI) and government-backed mortgage insurance.
Private Mortgage Insurance (PMI)
Private mortgage insurance (PMI) is a type of insurance that is typically required for conventional loans with less than a 20% down payment. This insurance is provided by private insurance companies, and the borrower is responsible for paying the premiums. PMI premiums are typically added to the borrower’s monthly mortgage payment and can range from 0.3% to 1.5% of the loan amount.
Government-Backed Mortgage Insurance
Government-backed mortgage insurance is provided by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), and the Department of Agriculture (USDA). FHA loans require mortgage insurance premiums (MIP) regardless of the down payment amount, while VA and USDA loans do not require mortgage insurance.
How Mortgage Insurance Affects Your Mortgage Payment
Mortgage insurance premiums can add a significant amount to your monthly mortgage payment. However, it’s important to note that mortgage insurance premiums are not permanent. If you have a conventional loan and you have paid down your mortgage balance to 80% of the home’s original purchase price, you may be able to request that your lender cancel your PMI. For FHA loans, mortgage insurance premiums are required for the life of the loan, unless the loan is refinanced.
Mortgage insurance can seem like an additional expense for homebuyers, but it’s important to understand the purpose of this insurance and how it can affect your overall mortgage payments. If you are a first-time homebuyer, it’s important to work with a knowledgeable lender who can guide you through the home buying process and help you understand your options for mortgage insurance. With the right information, you can make an informed decision that will set you up for success as a homeowner.