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What is mortgage insurance and how does it work?
What is mortgage insurance and how does it work?
Mortgage insurance reduces the lender’s risk in making a loan to you,
so you can qualify for a loan you might not otherwise be able to get.
Typically, borrowers who make a down payment of less than 20 percent of the
home’s purchase price must pay mortgage insurance.
They will also generally require mortgage insurance on FHA and USDA loans. Mortgage insurance increases the cost of your loan. If you are required to pay mortgage insurance, it will be included in your total monthly payment to the lender, your closing costs, or both.
About mortgage insurance
Mortgage insurance, no matter what type, protects the lender, not you, if you fall behind on your payments. If you fall behind, your credit score may suffer and you may lose your home to foreclosure.
There are several types of low payment loans for borrowers. Depending on the type of loan you get, you will pay for mortgage insurance in different ways:
Types of loans and mortgage insurance
conventional loan
If you get a conventional loan; the lender will arrange mortgage insurance with a private company. Private mortgage insurance (PMI) rates vary based on down payment amount and credit score but are generally cheaper than FHA rates for borrowers with good credit. Most private mortgage insurance is paid monthly, with little or no down payment at closing.
Federal Housing Administration (FHA) loan
If you get a Federal Housing Administration (FHA) Loan, you pay mortgage insurance premiums to the Federal Housing Administration (FHA). FHA mortgage insurance is required for all FHA loans. The cost is the same regardless of your credit score, but there is a slight increase in premiums for down payments of less than five percent. FHA mortgage insurance includes both an upfront cost, which is paid as part of your closing costs, and a monthly cost, which is included in your monthly payment amount.
If you don’t have enough cash on hand to make the advance payment, you can roll it over to the mortgage instead of paying it out of pocket. If you do this, your loan amount and total cost of your loan will increase.
A loan from the United States Department of Agriculture
If you get a Loan from the United States Department of Agriculture (USDA), the program is similar to that of the Federal Housing Administration but generally cheaper. You will have to pay for the insurance at closing and as part of your monthly payment. As with FHA loans, you can pass the initial portion of the insurance premium onto your mortgage, rather than pay out of pocket, but doing so increases your loan amount and your overall cost.
Department of Veterans Affairs Loan
If you get a VA Loan, the VA guarantee replaces mortgage insurance and works in a similar way. With VA loans, which are loans to help military members, veterans, and their families, there is no monthly mortgage insurance premium. However, you will have to pay a “finance charge” up front. The amount of that charge varies depending on:
- Your type of military service
- The amount of your initial payment
- Your disability status
- If you are buying a home or refinancing
- If this is your first VA loan, or if you had another before
As with FHA and USDA loans, you can pass the upfront fee onto your mortgage instead of paying out of pocket, but doing so increases your loan amount and your total cost.
Beware of “piggyback” second mortgages
As an alternative to mortgage insurance, some lenders offer what’s known as a “piggyback second mortgage.” This option may be marketed as cheaper to the borrower, but that doesn’t necessarily mean it is. Always compare the total cost before making a final decision. Learn more about piggyback second mortgages .
Advice
Once you’ve paid off a portion of your loan, you may be eligible to cancel your mortgage insurance. if you could cancel it, you would not have to pay the monthly cost. Learn more about canceling your mortgage insurance.
how to get help
If you are behind on your mortgage or are having difficulty making payments, you can use the CFPB’s Find a Housing Counselor tool for a list of HUD-approved housing counseling agencies. and Urban Development) in its sector. You can also call the HOPE(TM) Helpline, which is open 24 hours a day, 7 days a week, at (888) 995-HOPE (4673).
What is private mortgage insurance?
Private mortgage insurance, also called PMI, is a type of mortgage insurance that you may be required to pay if you have a conventional loan. Like other types of mortgage insurance, PMI protects the lender, not you, if you default on your loan.
PMI is arranged by the lender but is provided by private insurance companies. PMI is typically required when you take out a conventional loan and make a down payment of less than 20 percent of the home’s purchase price. If you are refinancing with a conventional loan and your equity is less than 20 percent of the value of your home, PMI is also generally required.
How do I pay for a PMI?
There are several ways to pay for PMI. Some lenders may offer more than one option, while other lenders may not. Before you agree to a mortgage, ask lenders what options they offer.
The most common way to pay for PMI is through a monthly premium.
- The premium is added to your mortgage payment.
- The premium appears on your Loan Estimate and Closing Disclosure on Page 1, in the Projected Payments section. You will receive a Loan Estimate when you apply for a mortgage before you accept the mortgage.
- The premium is also listed on your Closing Disclosure on Page 1, in the Projected Payments section.
Sometimes you can pay for PMI with a single premium payment upfront at closing.
- This premium appears on your Loan Estimate and Closing Disclosure on page 2, in section B.
- If you make advance payment and then move or refinance, you may not be entitled to a return of premium.
Sometimes you can pay both ways, with initial and monthly premiums.
- This initial premium appears on your Loan Estimate and Closing Disclosure on page 2, in section B.
- The premium added to your monthly payment amount appears on your Loan Estimate and Closing Disclosure on page 1, in the Projected Payments section.
Lenders may offer you more than one option. Ask the loan officer to help you calculate the total costs for different terms that are realistic for you.
What factors should I consider when deciding on a loan that requires PMI?
Like other types of mortgage insurance, PMI can help you qualify for a loan you might not otherwise be able to get. But, it can increase the cost of your loan. And, it won’t protect you if you run into trouble with your mortgage; it only protects the lender.
Lenders sometimes offer conventional loans with smaller payments that do not require PMI. You generally pay a higher interest rate on these loans. Paying a higher interest rate can be more or less expensive than PMI; It depends on several factors, including how long you plan to stay in the home. You may also want to consult with a tax advisor if paying more in interest or for PMI could affect your taxes differently.
Borrowers with a low down payment might also consider other types of loans, such as an FHA loan. Other types of loans may be more or less expensive than a conventional PMI loan, depending on your credit score, the amount of your down payment, the particular lender, and general market conditions.
You might also consider saving the money for a 20 percent down payment. When you make a 20 percent down payment on a conventional loan, PMI is not required. Plus, you could receive a lower interest rate with a 20 percent down payment.
Ask lenders to show you detailed prices for different options so you can see which one is the best deal.
Tip: You may be able to pay off your monthly mortgage insurance premium once you’ve built up some equity in your home. Learn more about your rights and ask lenders about their cancellation policies.
Warning: Private mortgage insurance protects the lender, not you. If you fall behind on your payments, PMI will not protect you and you may lose your home to foreclosure.
