In most cases, the process of buying a home involves taking out a mortgage and making a down payment. However, if your down payment is less than 20 percent of your home’s purchase price or you have a fixed mortgage (such as an FHA loan), you may need to purchase mortgage insurance. For lenders, these are high-risk loan situations, so they need mortgage insurance to protect their interests.
What is mortgage insurance and what does it cover?
Mortgage insurance is an insurance policy that protects the mortgage lender and is paid by the borrower of the loan. With mortgage insurance, the lender or titleholder is covered if you are unable to repay the mortgage for any reason. This can include payment defaults, failure to meet contractual obligations, death or any number of other circumstances that prevent the mortgage from being paid off in full.
How mortgage insurance works
In general, if you put less than 20 percent down on a home purchase, you will need to pay for mortgage insurance. This is because you have less invested in the home up front, so the lender takes on a risk in giving you a mortgage. How much you pay depends on the type of loan you have and other factors.
Even with mortgage insurance, you’re still responsible for the loan, and if you fall behind on payments or default, you could lose your home to foreclosure.
How much does mortgage insurance cost?
The higher your down payment, the lower your mortgage insurance premium.
With private mortgage insurance (PMI) on a conventional loan, you can expect to pay 0.58 percent to 1.86 percent of your loan principal amount. That equates to $58 to $186 per month for a $100,000 loan.
If you have an FHA loan, your upfront premium is 1.75 percent of your loan amount, while your annual premium is between 0.45 percent and 1.05 percent. For a $350,000 loan, your upfront MIP premium would be $6,125, and your annual premium would fall between $1,575 and $3,675 (paid monthly with your mortgage).
USDA loans come with a 1 percent upfront guarantee fee, as well as an annual fee equal to 0.35 percent of your loan amount. Using the $350,000 loan example, that would be $3,500 upfront and $1,225 annually.
For VA loans, funding fees range from 1.25 percent to 3.3 percent, depending on the amount of your down payment and whether you’ve previously taken out a VA loan. That comes to $4,375 to $11,550 for a $350,000 loan.
How is mortgage insurance calculated?
Mortgage insurance is calculated based on loan amount, loan-to-value (LTV) ratio (in other words, the amount of your down payment) and other variables. The higher your down payment, the lower your mortgage insurance premium.
Mortgage insurance and other fee types
The type of mortgage insurance you need depends on a number of factors, including the type of loan you have. Since mortgage insurance protects the lender, your lender chooses the insurer that provides the policy. Here are the different types of mortgage insurance:
Private Mortgage Insurance (PMI)
PMI, or personal mortgage insurance, is usually required if you get a conventional loan with less than 20 percent down. This may include a 3 percent or 5 percent conventional loan or another type of low-down payment mortgage. Most borrowers pay PMI with their monthly mortgage payments. Costs vary based on your credit score and loan-to-value (LTV) ratio.
FHA mortgage insurance premiums
MIP is the mortgage insurance premium required for an FHA loan with less than 20 percent down. You pay for this mortgage insurance upfront at closing, and also annually. The upfront MIP is equal to 1.75 percent of your mortgage, while the annual MIP ranges from 0.45 percent to 1.05 percent of your mortgage based on the amount you borrow, LTV ratio and loan term (30 years or 15 years).
USDA Guaranteed Fees
The USDA guarantee fee is one of the costs you must pay to get a USDA loan, which is only available to borrowers in designated rural areas and requires no down payment. The guarantee fee is equal to 1 percent of the loan and is paid upfront and annually, with an annual fee equal to 0.35 percent.
VA funding fees
VA loans also require no down payment, but are only available to service members, veterans and surviving spouses. Although no mortgage insurance is required for these loans, there is a funding fee that ranges from 1.25 percent to 3.3 percent of the loan, depending on whether you’re making a down payment (and its size, if so) and if it’s your first time with a VA loan. Receipts. In some circumstances this fund does not have to pay fees.
Mortgage insurance benefits
While mortgage insurance primarily benefits the lender, it serves a purpose for the borrower as it allows you to get a mortgage with limited down payment savings. Putting 20 percent down can be challenging, especially with rising home values. By paying for mortgage insurance, you can still get a loan without needing a large down payment (assuming you qualify based on other eligibility parameters).
Disadvantages of mortgage insurance
The downside of mortgage insurance: It’s an extra expense that you wouldn’t otherwise have to pay and can be difficult to get out of if you have an FHA loan.
Mortgage Insurance FAQ
If you have a conventional or FHA loan and you put down less than 20 percent of the home’s value, you must pay mortgage insurance. If you have a VA or USDA loan, you’ll also pay the fee (although there are exceptions for some VA borrowers).
How can you get rid of mortgage insurance?
You can get rid of mortgage insurance in a number of ways, including paying off your loan, refinancing or requesting cancellation when you reach 20 percent equity in your home. Remember: If you have an FHA loan and you put down less than 10 percent, you can’t get rid of the insurance until you refinance to another type of loan.
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