Mortgage insurance helps you qualify for a loan that you might not otherwise be able to acquire by reducing the lender’s risk of lending to you.
Mortgage insurance is typically required of borrowers who put less than 20% of the home’s price down on the loan. On FHA and USDA loans, mortgage insurance is often necessary as well. Mortgage insurance helps you qualify for a loan that you might not otherwise be able to acquire by reducing the lender’s risk of lending to you. However, it drives up the price of your loan. If you must pay mortgage insurance, the cost will be deducted from your overall monthly payment to your lender, your closing expenses, or both.
What Is Mortgage Insurance?
A mortgage lender or titleholder is covered by a mortgage insurance policy in the event that a borrower fails on payments, dies, or is otherwise unable to uphold the mortgage’s contractual duties. Private mortgage insurance (PMI), qualifying mortgage insurance premium (MIP) insurance and mortgage title insurance are all examples of mortgage insurance. The responsibility to make the lender or property holder whole in the event of a particular loss is what unites these.
On the other hand, mortgage life insurance, which is similar in sound, is intended to safeguard heirs in the event that the borrower passes away while still owing a mortgage. Depending on the conditions of the policy, it can repay either the lender or the heirs.
- Mortgage insurance is a type of insurance that safeguards a lender or titleholder in the event that a borrower misses payments, dies, or is otherwise unable to uphold their half of the bargain.
- Private mortgage insurance, qualifying mortgage insurance premiums, and mortgage title insurance are the three different kinds of mortgage insurance.
- It shouldn’t be confused with mortgage life insurance, which deals with protecting heirs in the event that the borrower passes away with unpaid debt.
In the event that a borrower defaults on their payments, mortgage insurance offers protection to the mortgage lender. Although mortgage insurance is intended to protect the lender, this lower risk enables lenders to provide loans to borrowers who might not otherwise be able to obtain a mortgage at all, much less one that is cheap.
Since a borrower who invests their own money in their property is less likely to stop making payments and allow the bank to foreclose on the home if their home’s value lowers or their personal finances worsen, lenders generally require a down payment of 20% as a requirement for qualifying for a mortgage. Both of these situations occurred during the recession and housing crisis of 2007, which brought attention to the need for mortgage insurance.
It is important to note that borrowers of conventional loans with lesser down payments must pay private mortgage insurance (PMI), whereas borrowers of loans backed by the Federal Housing Administration (FHA) must pay an insurance premium (MIP).
Types of Mortgage Insurance
PMI comes in four different forms:
- Monthly payments from the borrower. This is exactly what it says on the tin—the borrower normally pays the insurance each month along with their mortgage payment. The most typical kind is this.
- Single premium paid by the borrower. One upfront PMI payment must be made, or it may be rolled into the mortgage.
- Divided premium. A portion of the loan is paid upfront, and part is paid monthly.
- Loan was paid. Through a higher interest rate or higher mortgage origination fees, the borrower indirectly pays.
- If one sort of PMI would enable you to obtain a larger mortgage or benefit from a reduced monthly payment, you might choose it over another.
The borrower always pays the premiums for one type of MIP. FHA loans, however, don’t merely have MIPs every month. Additionally, they have a 1.75 percent of the base loan amount upfront mortgage insurance charge. The insurance on an FHA loan is comparable to split-premium PMI on a conventional loan in this regard.
How Much Is Mortgage Insurance?
The cost of mortgage insurance is determined as a proportion of your mortgage. Your insurance premiums will be more expensive and the risk to the lender will be higher the lower your credit score and smaller your down payment. However, when your principal balance decreases, so will the cost of your mortgage insurance.
The annual premiums for monthly private mortgage insurance paid by the borrower from MGIC, one of the top mortgage insurance providers in the US, range from $170 to $1,860 for every $100,000 borrowed on a fixed-rate 30-year loan, or 0.17% to 1.86% of the loan amount. On a loan for $250,000, that translates to $35 to $372 a month.
When your equity grows sufficiently to move you into a lower rate bracket, certain PMI policies, known as “declining renewal,” allow your premiums to reduce each year. Other PMI plans, referred to as “continuous renewal,” are based on the size of your initial loan and remain the same for the first 10 years.
Your PMI payment on an adjustable-rate loan might reach 2.33%. This equates to $485 a month for a $250,000 loan or $2,330 for every $100,000 borrowed. If you’re getting a mortgage on a second house, PMI is also more expensive.
With an FHA loan, it’s most likely that you’ll put down less than 5% on a 30-year loan for less than $625,500 and that your MIP rate will be 0.85% of the loan balance annually. MIPs on a 30-year loan can be between $800 and $1,050 every $100,000 financed, or between 0.80% and 1.05% per year. For a loan of $250,000, that comes to $167 to $219 per month.
Borrowers who make larger down payments receive lower rates, while those who borrow in excess of $625,500 receive higher rates. MIPs don’t take your credit score into account.
How long must mortgage insurance be paid for?
When using PMI, the borrower must have at least 20% equity in their house before paying any monthly insurance premiums. The insurance provider will help to mitigate the lender’s loss if they go into foreclosure before then.
Unless you put down more than 10%, MIPs are payable for the duration of the loan. You would then be required to pay premiums for 11 years.
Pros and cons of mortgage insurance
Mortgage insurance serves a purpose for the borrower even if it largely helps the lender because it enables you to obtain a mortgage with little to no down payment savings. Since making a 20% down payment can be difficult, especially now that home values are rising, you can still obtain a loan by paying for mortgage insurance.
Additionally, by delaying until you have a 20% down payment, you run the chance of missing out on low mortgage rates. Mortgage insurance makes it possible to obtain those rates right away, which allows you to initially borrow more money with a smaller down payment while still saving money over time.
The drawbacks of mortgage insurance include the fact that you must pay it in addition to other costs and that it may be challenging to cancel if you have an FHA loan.
How to get rid of mortgage insurance
Mortgage insurance can be eliminated if you have a standard loan by just making loan payments. The Homeowners Protection Act mandates that lenders remove mortgage insurance when a borrower’s amount exceeds 78 percent of the initial purchase price or when the amortization period has halved (so after 15 years of a 30-year mortgage, for example).
Once your balance exceeds 80% of the initial value, you can also ask for cancellation before the automated elimination. If you are making your payments on time, certain lenders will consider this.
In order to avoid mortgage insurance, your final option is to refinance your mortgage. You can also have your house reappraise to check whether its value has increased and the LTV ratio has improved. These methods typically work if your house has increased in value since you first obtained your mortgage.