Mortgage insurance is a policy that protects lenders if you default on your loan. If you default, mortgage insurance will not pay the lender the entire balance but will cover their lost interest payments and administrative expenses. Foreclosure will take care of the rest.
Mortgage insurance may sound burdensome, but it serves a purpose. It allows loan products to exist that require down payments of less than 20%, ultimately making homeownership more accessible to more people.
Helpful or not, mortgage insurance isn’t a fun product to pay for. Here’s everything you need to know about this misunderstood financial product.
What is the difference between mortgage insurance and homeowners insurance?
Homeowner’s insurance compensates you if your home is damaged by certain events. A homeowner’s policy can help you pay for repairs after a storm or help you replace your belongings after a robbery.
Mortgage insurance pays the lender if you default. You buy the policy to protect the lender instead of buying it to protect yourself. It won’t help you if you default on the loan, and the existence of a mortgage insurance policy won’t prevent the lender from foreclosing on the home if you can’t make your payments.
Are there different types of mortgage insurance?
Yes. There are four types of mortgage insurance.
Private Mortgage Insurance (PMI) is the most common type of mortgage insurance. Lenders require you to pay for PMI when you take out a conventional home loan with a down payment lower than 20%. PMI gets rolled into your monthly mortgage payments.
Single-Premium Mortgage Insurance (SPMI) requires you to pay a one-time premium that’s due at closing.
Split-premium mortgage insurance is a hybrid product. You pay part of the premium upfront and the rest in monthly installments.
Lender-paid PMI also exists. In this arrangement, lenders pay for their own mortgage insurance but raise your interest rates to compensate for the expense.
Mortgage Insurance Premiums (MIP) is the name of the insurance program that FHA mortgages use.
How are mortgage insurance premiums set?
Mortgage insurance premiums are usually some percentage of the original loan amount. They can range from 0.58% to as high as 3.6%.
How long do you have to pay mortgage insurance?
A conventional loan will require you to pay PMI until you achieve 20% equity in the home. You may then cancel the PMI by making a request to the lender in writing.
Some loan types require you to pay mortgage insurance for the life of the loan. You would have to refinance to a conventional loan on 20% equity to avoid paying mortgage insurance.
How can you lower mortgage insurance premiums?
Increasing your equity by making a larger down payment can help you lower insurance premiums. A higher credit score may also result in lower premiums. Finally, different loan products will come with different PMI rates.
Are there advantages to paying mortgage insurance?
Mortgage insurance isn’t all bad. It allows you to take out a loan without saving 20% down. That means you can buy a home sooner.
In an era where home values go up so fast and so dramatically, mortgage insurance may even help you profit. Your home value could end up exceeding any amount you might pay for mortgage insurance.
The existence of mortgage insurance may allow you to get into a home before home prices go any higher.
Is there a way to avoid paying for mortgage insurance?
It depends. Some loan products, like FHA loans, require mortgage insurance no matter what. Other forms allow you to avoid mortgage insurance with 20% down.
Sometimes, special programs or certain loan products can help you avoid mortgage insurance. If mortgage insurance is a significant concern for you, tell Alex Doce during your free consultation. He will help you evaluate all of your options.
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Schedule a one-on-one consultation with Alex Doce today! He’ll answer all of your questions about mortgage insurance while helping you find the right home loan for your situation.
Plus, you’ll receive honest written information, excellent service, and constant, clear communication.
Call (800) 355-ALEX to get started today.
