Mortgage Insurance: What Is It?

Mortgage insurance is the protection that many lenders, especially when you are taking out an FHA or USDA loan, will require if your down payment amount is less than 20% of the entire loan amount. If you were to stop paying for your loan or fall behind, this type of insurance will protect the lender from loss. While having mortgage insurance will increase the likelihood of you getting approved and retaining a loan, it also will increase your monthly payment amounts.

Below, we’ll discuss the different types of loans available and what their individual mortgage insurance stipulations are.

FHA Loan

When you have an FHA loan as a first time home buyer, there are requirements for all borrowers to have mortgage insurance. This is because an FHA loan requires such a low down payment percentage of 3-5%. The mortgage insurance requirement, in this case, will require you pay a fee upfront, and then you will need to pay a monthly insurance amount as well.

Conventional Loan

With a conventional loan, you can typically get private mortgage insurance (PMI). The rates for this type of insurance will vary and can be low if you have a higher credit score. Often times you will have an opportunity to cancel your PMI at certain points during your mortgage. Also, you will not need to pay an insurance down payment in this case, you will be required to just make monthly insurance payments.

USDA Loan

With a USDA loan, there also is not a down payment requirement, therefore mortgage insurance is required. You will also be required to pre-pay a portion of the insurance with this situation. The remainder of your insurance payments will be paid monthly along with your mortgage payments.

VA Loan

A VA loan is the type of loan you can get when you are in the military or after military service. You don’t have to purchase traditional mortgage insurance with this loan; your VA loan is covered by a VA guarantee instead. There is typically a funding fee that’s determined, however, for which you’ll need to be prepared to pay.

Piggyback Mortgage

This is an option made to some borrowers so that they can obtain a mortgage with a lower down payment without having to purchase homeowners mortgage insurance. Often, this is called a piggyback mortgage. Be careful if considering this type of second mortgage, however, as your loan will be structured differently, and you could end up in a bad situation financially if your home’s value declines before you are able to pay off the second mortgage.

Canceling Your Mortgage Insurance

If you are in a situation where you were required to carry mortgage insurance, remember that you can cancel it once you’ve hit the 80/20 mark. This means one you’ve paid off 20% of the home’s value. This is an important opportunity because it can save you hundreds of dollars each year once you no longer have to carry mortgage insurance.