WHAT IS MORTGAGE INSURANCE?
By Jessica Hudson | December 1, 2020
Mortgage insurance is an insurance policy that protects a mortgage lender or titleholder if the borrower defaults on payments, passes away, or is otherwise unable to meet the contractual obligations of the mortgage. You’ll have to pay for it if you get an FHA or USDA mortgage or put down less than 20% on a conventional loan. With a conventional mortgage – a home loan that isn’t federally guaranteed or insured – a lender will require you to pay for private mortgage insurance, or PMI, if you put less than 20% down. With an FHA or USDA loan, you’ll pay for mortgage insurance regardless of the down payment amount. VA mortgages require a funding fee, unless you are exempt, rather than mortgage insurance.
How Does Mortgage Insurance Work?
The borrower bears the cost of mortgage insurance, but it covers the lender. Mortgage insurance pays the lender a portion of the principal in the event you stop making mortgage payments. Meanwhile, you’re still on the hook for the loan if you can’t pay, and you could lose the home in foreclosure if you fall too far behind.
Conventional Loans - Private Mortgage Insurance (PMI)
Many lenders offer conventional mortgage with low down payment requirements – some as low a 3%. A lender likely will require you to pay for private mortgage insurance, or PMI, if your down payment is less than 20%. You can use a PMI calculator to estimate the cost of PMI, which will vary according to the size of your home loan, credit score and other factors. Typically, the monthly PMI premium is included in your mortgage payment. You can request to cancel PMI after you have over 20% equity in your home.
FHA Loans - Mortgage Insurance Premium (MIP)
FHA loans, which are insured by the Federal Housing Administration, feature minimum down payments as low as 3.5% and have easier credit qualifications and debt-to-income qualifications that conventional loans. FHA home loans require an upfront mortgage insurance premium and an annual premium, regardless of the down payment amount. The upfront premium is 1.75% of the loan amount, and the annual premium ranges from .45% to 1.05% of the average outstanding balance of the loan for that year. You pay the annual mortgage insurance premium, or MIP, in monthly installments for the life of the FHA loan if you put less than 10%. If you put down over 10%, you pay MIP for 11 years. Like a conventional mortgage, the MIP is included in your monthly mortgage payment. The upfront premium, or UFMIP, is generally financed into the loan.
USDA Loans - Mortgage Insurance Premium (MIP)
USDA mortgage insurance is paid via two fees: an upfront guarantee fee equal to 1% of the loan amount, and an annual fee equal to 0.35% of the loan amount. The one-time upfront guarantee fee, which is also referred to as the USDA funding fee, is paid at closing and typically financed into the loan. The annual fee is lumped into your monthly mortgage payment and is paid for the life of the loan.
VA Funding Fee
VA loans, from Veteran Affairs, require no down payment and feature low interest rates for active, disabled, retired military service members, certain National Guard members and reservists, and eligible surviving spouses. They do not require mortgage insurance, but most borrowers will pay a funding fee ranging from 1.25% to 3.3% of the loan amount for purchase loans and .5% for on refinances. This fee is generally financed into the loan and depends on a wide variety of factors, including whether you’ve applied for a VA loan before and how much money you’re putting down, if any. Veterans can be exempt from this fee if they have over a 10% disability rating.