What is mortgage insurance?
Mortgage insurance covers costs lost by the lender in case the borrower defaults. If you put less than 20% down, most loan programs will require you to buy mortgage insurance, but not all mortgage insurance is the same. It can vary by:
- Loan Type
- Payment structure
- Credit score
- Down payment
- Property Type
Facts about mortgage insurance
Conventional loans have private mortgage insurance while government loans such as FHA, VA or USDA have their own insurance.
Mortgage insurance payment structure
Private mortgage insurance can be paid up front, on a monthly basis or a combination. Government loans tend generally require some payment up-front in the form of a premium, funding fee or guarantee fee, but it can be financed into the loan.
Credit score and down payment
The lower your credit score and down payment, the higher your insurance costs are likely to be. This is similar to car insurance. If you don’t have a good driving record, you will most likely pay more.
Different property types
Lastly, some property types have higher mortgage insurance premiums, such as investment properties, manufactured homes or second homes.
Removing mortgage insurance
Unlike car insurance, there are times where you can earn your way out of mortgage insurance. While this does not apply to government loans, you can petition for the removal of private mortgage insurance after two years if:
You pay the mortgage down to 80% of the purchase price (bringing you to that 20% equity lenders are looking for).
Your home appreciates in value. Between 2-5 years into the mortgage, 25% equity is required to qualify for the removal of mortgage insurance. After 5 years in the loan, as little as 20% equity in the property can get it removed.
You refinance, and the new loan balance is less than 80% of the home’s value.
Low- to no-down payment programs help millions of families afford their first home, and mortgage insurance preserves that opportunity in the marketplace. Nobody wants to pay more than they need to, but by understanding the purpose of mortgage insurance and how to use it to your advantage, you will be a stronger buyer in the end.
The above information is for educational purposes only. All information, loan programs and interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply.