An Introduction to Mortgage Insurance
What is Mortgage Insurance? How will it benefit you? And do you really need it?
Let’s find out…
What is Mortgage Insurance?
Mortgage insurance is a form of protection for lenders that allows them to provide borrowers with loans they may otherwise not be eligible for. When borrowers do not have enough money for a 20% down payment, mortgage insurance is required by the lender. This also occurs with certain kinds of loans, like an FHA or USDA loan. Since mortgage insurance is meant to protect the lender, borrowers see an increase in the total cost of their loan. This additional cost for mortgage insurance may be included in monthly mortgage payments, at closing, or a combination of both.
Will Mortgage Insurance Help Me If I Miss A Payment?
It is important to note that mortgage insurance is not designed to protect borrowers, rather it protects the lender should mortgage payments fall behind. Therefore, borrowers are still liable for missed payments and will see their credit scores affected along with potentially more serious consequences, like the loss of a home to foreclosure.
How Is Mortgage Insurance Paid?
Mortgage insurance is paid in different ways, depending on the type of loan a borrower obtains. There are multiple kinds of loans that offer low down payments to borrowers.
With conventional loans, lenders may obtain mortgage insurance via a private company. This is called private mortgage insurance (PMI) and rates fluctuate depending upon credit scores and down payment amount. Most PMI is paid on a monthly basis, with a small payment or no payment at all required at closing.
With a Federal Housing Administration (FHA) loan, mortgage insurance is paid directly to the FHA. These rates are generally fixed and not affected by credit scores. There is an exception and rates may increase slightly if the down payment amount is less than 5%. FHA mortgage insurance is paid with both closing costs and a monthly amount included in the mortgage payment.
With a US Department of Agriculture (USDA) loan, borrowers see similar mortgage insurance premiums as with an FHA loan, except USDA mortgage insurance is more affordable. Payment for premiums is made with closing costs and with a monthly cost included in the mortgage payment. Like with FHA loans, borrowers have the option to include upfront mortgage insurance costs in their mortgage and will consequently see an increase to their loan amount.
With a Department of Veterans’ Affairs (VA)-backed loan, mortgage insurance is replaced by the VA and serves a similar purpose. VA-backed loans are created to assist veterans, service members, and their families and do not require a monthly mortgage insurance premium. The difference here is that a funding fee is required upfront. The total amount of the funding fee shifts depending upon several factors: military service type, down payment amount, disability status, whether the loan is a refinance or for a new home, and whether this is the first time a borrower is obtaining a VA loan.
Are There Alternatives To Mortgage Insurance?
Some lenders offer an alternative to mortgage insurance by creating a second loan, often referred to as a “piggyback” loan. Sometimes this option is cheaper than mortgage insurance, however, this varies per loan. It is always best to double check costs to ensure the best outcome for the borrower.