In most cases, the home buying process involves obtaining a mortgage loan and making a down payment. However, if your down payment is less than 20 percent of your home’s purchase price or you’re taking out a particular mortgage (such as an FHA loan), you may also need to purchase mortgage insurance. For lenders, these are higher risk credit situations, so they require mortgage insurance to protect their interests.
Next, we’ll explain the basics of mortgage insurance, including what it covers and who needs it.
Reading: How is mortgage insurance paid
what is mortgage insurance?
mortgage insurance is an insurance policy that protects the mortgage lender and is paid for by the borrower of the loan.
You may be wondering: what does mortgage insurance cover? Usually when you buy an insurance plan, it’s to provide you with coverage. mortgage insurance, however, provides coverage for your lender.
With mortgage insurance, the lender or owner is covered in the event that you are unable to pay the mortgage for any reason. this can include default on payments, breach of contractual obligations, death, or any number of other situations that prevent the mortgage from being paid in full.
how mortgage insurance works
Now that we’ve covered the definition of mortgage insurance, let’s answer another popular question: how does mortgage insurance work?
In general, you must pay mortgage insurance if you make less than a 20 percent down payment on a home purchase. This is because you have invested less in the house upfront, so the lender has taken more risk in giving you a mortgage. how much you’ll pay depends on the type of loan you have and other factors.
Even with mortgage insurance, you’re still responsible for the loan, and if you fall behind or stop making payments, you could lose your home to foreclosure.
types of mortgage insurance and other fees
The type of mortgage insurance you’ll need depends on several factors, including the type of loan you have. Since mortgage insurance is meant to protect lenders, your lender is responsible for choosing the company that provides your mortgage insurance.
Here’s how these types of mortgage insurance differ, including when they pay and how much they cost.
private mortgage insurance
pmi, or private mortgage insurance, is generally required if you take out a conventional loan with less than 20 percent down. this may include a 3 percent or 5 percent conventional loan or other type of low down payment mortgage. Most borrowers pay PMI with their monthly mortgage payment. cost may vary based on your credit score, loan-to-value (ltv), and other factors.
mortgage insurance premium
mip is the mortgage insurance premium required for an fha loan with less than 20 percent down. You will pay for this mortgage insurance in advance at closing and also annually. The initial mip is equal to 1.75% of your mortgage, while the annual mip ranges from 0.45% to 1.05% of your mortgage depending on the amount you borrowed, the ltv ratio, and the term length of the loan. loan.
usda guarantee fee
The USDA Guarantee Fee is one of the costs you’ll pay to obtain a USDA loan, which is available to borrowers in designated rural areas and has no down payment requirements. the guarantee fee is paid upfront and annually, with the initial fee equal to 1 percent of the loan and the annual fee equal to 0.35 percent.
goes financing rate
VA loans also have no down payment requirement, but are available exclusively to service members, veterans, and surviving spouses. While mortgage insurance is not required for these loans, there is a financing fee that ranges from 1.4% to 3.6% of the loan, depending on whether you’re making a down payment (and the size of the loan, if any). is so) and if this is the first time you get a loan it goes. this financing fee does not have to be paid in some circumstances.
how much does mortgage insurance cost?
As we’ve covered, your mortgage insurance premium will depend on your loan amount, your LTV ratio, and other variables. however, the higher your down payment, the lower your mortgage insurance premium.
With PMI, you can expect to pay between 0.58% and 1.86% of your original loan amount. that works out to $58 to $186 per month for every $100,000 borrowed.
If you have an fha loan, your initial premium is 1.75 percent of your loan amount, while your annual premium ranges from 0.45 percent to 1.05 percent. For a $200,000 loan, your initial mip premium would be $3,500 and your annual premium would be between $900 and $2,000 (paid monthly with your mortgage).
usd loans come with an initial guarantee fee of 1 percent, as well as an annual fee equal to 0.35 percent of your loan amount. Using the $200,000 loan example, that would work out to $2,000 up front and $700 per year.
For VA loans, the financing fee will range from 1.4% to 3.6%, depending on the amount of your down payment and whether or not you’ve gotten a VA loan before. that comes out to $2,800 to $7,200 for a $200,000 loan.
Benefits of mortgage insurance
While mortgage insurance primarily benefits the lender, it serves a purpose for the borrower because it allows them to obtain a mortgage with limited down payment savings. Making a 20 percent down payment can be challenging, especially with home values on the rise, so by paying mortgage insurance, you can still get a loan without a large down payment.
By choosing a mortgage that requires mortgage insurance, you can become a homeowner sooner and with a lower initial cost. Plus, it allows you to consider homes in other neighborhoods that might not have been in your price range.
waiting until you have a 20 percent down payment also risks missing out on favorable mortgage rates. Mortgage insurance offers the ability to get those rates now, which means you can save interest over time, despite borrowing more money with a smaller down payment up front.
However, mortgage insurance also has its drawbacks, primarily because it’s an additional expense that you might not otherwise have to pay and can be difficult to get out of if you have an FHA loan.
how to get rid of mortgage insurance
There are also downsides to mortgage insurance. the biggest drawback is that it is an additional expense that you would not otherwise have to pay. It can also be difficult to get out if you have an FHA loan without refinancing. If you’re concerned, there are a few options to get rid of your mortgage insurance.
If you have a conventional loan, you can get rid of mortgage insurance by simply paying off your loan. Under the Homeowners Protection Act, lenders must cancel your mortgage insurance once your balance reaches 78 percent of the original purchase price or once you reach half of your amortization schedule (that is, after 15 years of a 30-year mortgage, for example).
You can also request cancellation before automatic deletion once your balance reaches 80 percent of the original value. some lenders are receptive to this if you are current on your payments.
For fha loans, cancellation guidelines depend on the origination date of your loan. however, for loans originating after June 3, 2013, you cannot cancel your mortgage insurance until your mortgage is paid in full, unless you have made a down payment of 10 percent or more. in that case, your mip will end after 11 years.
Finally, you can try to refinance your mortgage to get out of mortgage insurance, or reappraise your home to see if it has gained value and improves the LTV ratio. In general, these strategies may work if your home has appreciated significantly since you first got your mortgage.
When you’re buying a home with less than a 20 percent down payment, your lender may require mortgage insurance to protect your financial interests in the event you’re unable to repay your loan.
Although it may seem like just another hurdle on your journey to homeownership, choosing a mortgage that requires it has some advantages. In particular, paying for your property with a combination of a down payment and mortgage insurance makes it easier to become a homeowner, even if you can’t pay the 20 percent up front.