Buyers Ask: What is mortgage insurance?

Mortgage insurance is a type of insurance that protects the lender in the event that a borrower defaults on their mortgage loan. This can happen if the borrower stops making payments or if they are unable to make payments due to a job loss, medical emergency, or other unforeseen circumstance.

There are two main types of mortgage insurance: private mortgage insurance (PMI) and government mortgage insurance.

Private mortgage insurance (PMI) is typically required on conventional loans with down payments of less than 20%. PMI is arranged by the lender and provided by private insurance companies. It insures the lender against loss caused by borrowers failing to make loan payments.

Government mortgage insurance is available on FHA, USDA, and VA loans. Government mortgage insurance is backed by the federal government, which means that the government will pay the lender if the borrower defaults on the loan.

Mortgage insurance is not required by law, but most lenders require it for loans with down payments of less than 20%. This is because borrowers with lower down payments are considered to be more of a risk to the lender.

Mortgage insurance is typically paid monthly as part of the overall mortgage payment. The cost of mortgage insurance varies depending on the loan amount, loan term, and borrower's credit score. However, it is typically between 0.5% and 1% of the loan amount each year.

Mortgage insurance can be dropped once the borrower's equity in the home reaches 20%. This can happen through a combination of paying down the principal balance of the loan and the home's value increasing.

Here are some of the pros and cons of mortgage insurance:

Pros:

  • Allows borrowers to qualify for a home loan with a down payment of less than 20%
  • Protects lenders from financial losses in the event of a borrower default

Cons:

  • Increases the monthly mortgage payment
  • Can be expensive over the life of the loan
  • Does not protect the borrower from foreclosure

If you are considering a home loan with a down payment of less than 20%, be sure to weigh the pros and cons of mortgage insurance carefully. You should also talk to your lender about other options that may be available to you, such as down payment assistance programs.

 

 

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