Understanding Mortgage Insurance
The home buying process can be overwhelming and confusing, especially when it comes to understanding mortgage insurance. Let me explain.
2 Min
Mortgage insurance is insurance arranged by lenders that protects THEM and not you if you fail to make payments on your property and foreclose. It helps lower the risk to the lender making a loan to you while increasing the cost of your loan. It’s incorporated into your monthly payment and possibly upfront closing costs depending on the lender. Let’s take a dive and look at how different loan types have different mortgage insurance requirements.
With a conventional loan, your lender will arrange your mortgage insurance through a private company. Private mortgage insurance (PMI) rates are determined by your down payment and credit score. Most lenders require no upfront cost for PMI and you can even cancel your PMI. In order to do so, you can put 10-20% down depending on the program, pay off 20% of your loan and request cancellation from your lender, or have it automatically terminate after paying off 22% of your loan.
When it comes to FHA loans, you pay a mortgage insurance premium (MIP). This is required for all FHA loans. The cost will be the same no matter what your credit score is and will only increase with lower down payments. FHA mortgage insurance includes an upfront cost that can either be financed into the loan amount or paid out of pocket at closing, along with a monthly cost included in your monthly mortgage payment.
With a VA loan, you have a VA guarantee that replaces your mortgage insurance and functions in nearly the same way. There is no monthly cost but you are required to pay an upfront funding fee. This fee is calculated based on the following:
Just like an FHA loan, you can either pay the funding fee as upfront closing cost out of pocket or add it to your loan amount which will result in a slightly increased payment.
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