What Is Mortgage Insurance and Who Needs It?

There are a lot of expenses when it comes to buying a home. From the down payment to closing costs — and don’t forget fees for your inspections, appraisal, and other services. And depending on which loan you choose, you might also have to pay for mortgage insurance.

If you’re planning to apply for a mortgage soon, make sure you understand what your insurance requirements may be — and how much they’ll cost you.

Here’s what you should know about mortgage insurance so you’re prepared:

  • What is mortgage insurance?
  • When you need mortgage insurance
  • What’s the difference between PMI and MIP?
  • What you should know about mortgage insurance as a homebuyer
  • Mortgage insurance CAN be avoided

What is mortgage insurance?

Mortgage insurance shouldn’t be confused with homeowner’s insurance. Homeowner’s insurance is meant to protect you from financial loss if there’s an issue or damage on your property. Mortgage insurance, on the other hand, is designed to protect your lender if you can’t repay your loan.

Here’s the difference in how each type of insurance works:

  • Homeowners insurance: You’ll purchase this insurance to cover damage and liability on your property. If your home is burglarized, damaged in a storm, or experiences some other issue, your insurance will help cover the costs.
  • Mortgage insurance: When you get a mortgage loan, your lender might require you to pay for a mortgage insurance policy. In the event you fall behind on your mortgage, the lender calls on that policy to recoup their losses.
Good to know: Mortgage insurance doesn’t offer protection for you, the borrower, though it will allow you to make a lower down payment when buying your home.

Learn More: How to Buy a House

When you need mortgage insurance

When you get a mortgage, insurance varies by loan product. Here’s what you can expect with each type of loan:

  • Conventional loans: On conventional loans, you’ll only need mortgage insurance if you make a down payment under 20% (sometimes, not even then). Conventional loans don’t require an upfront mortgage insurance payment — just a monthly one you’ll pay along with your mortgage.
  • FHA loans: If you’re getting an FHA loan, mortgage insurance will always be required both upfront and annually (spread across your monthly mortgage payments).
  • USDA loans: USDA loans also require upfront and annual premiums, though they’re referred to as “guarantee fees.”

VA loans do not require mortgage insurance. There is a “funding fee,” but this is paid at closing and can be rolled into the loan balance.

What’s the difference between PMI and MIP?

There are two types of mortgage insurance: PMI (private mortgage insurance) and MIP (mortgage insurance premiums). Here’s how those differ:

  • PMI: PMI is what you’ll need on a conventional mortgage, and your lender will choose the policy.
  • MIP: MIP is the insurance required on FHA loans.

With USDA loans, the Department of Agriculture is the guarantor, so your premiums will be paid directly to the USDA as part of your mortgage payment.

What you should know about mortgage insurance as a homebuyer

Mortgage insurance can be complicated to understand, especially if you’re a first-time homebuyer.

So if you’re feeling confused about mortgage insurance, just remember these basics:

  1. Mortgage insurance protects the mortgage lender — not you. Though you’re footing the bill, mortgage insurance won’t protect you if you fall behind on your mortgage — only your lender. The lender can still foreclose on your home, but they are able to recoup the losses through the insurance policy.
  2. Your mortgage insurance requirements depend on your home loan. Not all loans require mortgage insurance, and mortgage rates vary greatly from one loan product to the next.
  3. Sometimes you can roll the fee into your loan balance. You can’t do this with conventional PMI, but on FHA loans, you can actually finance your upfront mortgage premiums and roll them into your loan. You can also do this with the guarantee fees and funding fees on USDA and VA loans. Keep in mind this will increase your loan balance, monthly payments, and total interest paid over time.
  4. You might be able to cancel your mortgage insurance later on. With PMI, you can cancel your mortgage insurance once you reach an 80% loan-to-value ratio (you’ve paid of at least 20% of the home’s value). On FHA loans, you can cancel after 11 years if you made at least a 10% down payment.
  5. Mortgage insurance premiums vary. You’ll pay 1.75% upfront for an FHA loan, and then anywhere from 0.45% to 1.05% annually. Conventional mortgage insurance rates vary depending on your down payment amount and credit score, and USDA rates are 1% upfront and 0.35% every year.

Keep Reading: How to Pay Off Your Mortgage Faster

Mortgage insurance CAN be avoided

Mortgage insurance isn’t always a requirement. If you make a large enough down payment or avoid government-backed loans, you can actually steer clear of it.

But avoiding mortgage insurance is just one way to lower your costs as a homebuyer. If you want to save even more on your home purchase, make sure you shop around for mortgage rates first.

Use our tool below to get started and get your mortgage pre-approval today.

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