What Is Mortgage Insurance?
If you're planning to buy a home soon, you'll want to familiarize yourself with mortgage insurance.
Before you moan and groan about one more thing added to the home-buying process, consider that mortgage insurance is something your lender might require, depending on your situation. It's a way to lower risks in certain lending situations.
Mortgage insurance is a policy your lender might require to protect its investment when you borrow money to buy a home. This type of insurance is required if your down payment for your home purchase is less than the traditional 20% of the purchase cost. Its purpose is to protect the lender since they're letting you take out a mortgage with a smaller down payment.
While you're required to pay it, this type of insurance doesn't benefit you in the traditional sense. However, paying for it could make it possible for you to become a homeowner sooner since you don't have to save up the full 20% for your down payment.
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If your lender requires you to have mortgage insurance, they'll choose the mortgage insurance company and establish the policy. You pay the monthly premiums, which are typically built into your mortgage payments. If you stop paying your mortgage, the insurance company will pay part of the principal amount that's left to the lender.
However, this doesn't stop you from facing consequences for not paying. Your lender can start the foreclosure process if you stop paying your mortgage, even if you have insurance in place.
You'll pay the insurance premium until you have 20% equity in the home. This could be the result of you making enough mortgage payments or your home increasing in value. Lenders often automatically remove the insurance when you pay off enough to have 20% equity. However, you can also request to have the insurance removed sooner if you've reached 20% equity. If you feel your home has increased in value, having it appraised can prove to the lender that you no longer need the insurance.
If you have a conventional loan, you'll need private mortgage insurance (PMI). Government-backed loans, such as FHA, USDA and VA loans, have different fees that serve a similar purpose as PMI. Borrowers can either pay the fee upfront or roll it into the mortgage and pay it over the life of the loan.
For conventional borrowers, there are a few different types of PMI that could be used, including:
- Borrower-paid: This is the traditional option, and the one most borrowers use. You pay the premiums each month, often as part of your mortgage payment, until you reach 20% equity.
- Single-premium: Instead of splitting up the premium into monthly payments, this option requires you to pay the total premium upfront in one lump sum. You can also ask the seller to cover some or all of this amount. However, you could pay more than necessary by paying it all at once if you sell or have an increase in value that gets you to 20% equity faster.
- Split-premium: This option combines the two previous options. When you close on your home, you pay a large portion of the premiums. The rest of the premium cost is spread out into monthly payments.
- Lender-paid: Some lenders will pay the PMI premiums, but they'll usually charge you a higher interest rate. This results in a higher payment over the life of the loan than you might have had with borrow-paid PMI, which you can drop when you reach 20% equity.
Comparing the options and looking at how each one affects your payments can help you decide which one is right for your needs.
PMI premiums vary depending on the details of the loan, including the total loan amount, the loan term, your down payment, the type of interest and your personal situation, including your credit score and debt-to-income ratio. Lending Tree says you can expect to pay between $30 and $70 per $100,000 you borrow. If you borrow $300,000, your monthly premium would be between $90 and $210.
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