When buying a home with a mortgage loan, it’s essential to understand the costs you’ll be responsible for. One of those expenses may be mortgage insurance. Let’s take a look at what mortgage insurance is and how it works so you can make an informed decision during the homebuying process.
What is mortgage insurance?
In most cases, the process of buying a home involves taking out a mortgage and making a down payment. With a conventional mortgage, which is a home loan that isn’t federally guaranteed or insured, you have to pay for private mortgage insurance (PMI) if you put less than 20% down.
With an FHA mortgage backed by the U.S. Federal Housing Administration, you’ll pay for mortgage insurance regardless of the amount of your down payment.
Mortgage insurance isn’t required with USDA mortgages backed by the U.S. Department of Agriculture and VA mortgages backed by the U.S. Department of Veterans Affairs. However, there are fees to protect lenders in case borrowers default. So you may still be responsible for the extra cost of these home loans in exchange for the low down payment requirement.
Be sure to ask your mortgage lender about your available options for mortgage insurance when shopping for a mortgage loan.
How does mortgage insurance work?
As the borrower, you pay the cost of mortgage insurance each month, although you are actually paying to cover the lender. If you fail to make mortgage payments, your lender will receive payments from the mortgage insurance provider. You are still responsible for repaying the mortgage loan.
Private mortgage insurance vs. mortgage insurance premiums
Mortgage insurance comes in two forms: private mortgage insurance (PMI) and mortgage insurance premiums (MIP).
Conventional mortgage borrowers with a downpayment of less than 20% pay private mortgage insurance. Depending on the borrower’s credit score, the PMI rate will increase or decrease. PMI rates are often lower than MIP rates. Most of the…