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<\/figure><\/div>\n\n\nMortgage insurance protects your mortgage lender in the event that you, the borrower, can\u2019t repay your mortgage.<\/p>\n\n\n\n
Like homeowner’s insurance, your mortgage lender may require you to pay for mortgage insurance as a condition of financing your home purchase.<\/p>\n\n\n\n
Unlike homeowner’s insurance\u2014which pays you, the homeowner, if something bad happens to your home\u2014mortgage insurance pays your mortgage lender if you, the borrower, can’t pay your mortgage.<\/p>\n\n\n\n
Without mortgage insurance, most lenders would be unwilling to take a risk on borrowers who aren\u2019t able to make a significant down payment.<\/p>\n\n\n\n
When talking about mortgage insurance, you\u2019ll mostly run across the acronym PMI, which stands for private mortgage insurance<\/em>. PMI applies to conventional mortgages loans\u2014that is, mortgages not backed by government programs.<\/p>\n\n\n\n Government-backed FHA loans have a special type of mortgage insurance called MIP, which stands for mortgage insurance premium<\/em>. PMI and MIP are pretty similar\u2014with one critical difference, which we\u2019ll cover in a bit.<\/p>\n\n\n\n Maybe. If your down payment is going to be less than 20%, most lenders of conventional loans will require you to pay for private mortgage insurance.<\/p>\n\n\n\n Fun fact: last year, the typical American homebuyer put down 10%<\/a>. The typical first-time homebuyer only put down 5%<\/a>. That means that most folks buying homes in America are paying mortgage insurance of some kind, at least to start.<\/p>\n\n\n\n The reasoning behind mortgage insurance is actually pretty simple. Your lender is taking a (carefully calculated) risk by offering you a mortgage.<\/p>\n\n\n\n If you suddenly decide to stop paying your mortgage and your lender has to foreclose on your home, your lender would be out all of the money they just lent you to buy that home, plus all the time, effort, and money they\u2019ll lose having to find a new buyer for the place.<\/p>\n\n\n\n For your lender, the prospect of having to foreclose a home to try to recoup the mortgage is a major headache. And the potential headache becomes even more significant for the lender if the borrower doesn\u2019t have much equity in the home.<\/p>\n\n\n\n For example: let\u2019s say you\u2019re buying a home that costs $300,000. If you put in a $60,000 down-payment, you\u2019d only need to borrow about $240,000 from your lender. <\/p>\n\n\n\n If you later defaulted on that mortgage, you\u2019d lose your $60,000. (That, along with whatever you\u2019d managed to pay on the mortgage before defaulting.) Your lender would have the deed to a home worth $300,000, for which the lender only put up $240,000. That leaves your lender some wiggle room to make back the money they lent you to buy the place. Theoretically, your lender could sell your former property quickly for $50,000 less than you paid and still make back all the money they risked on your mortgage.<\/p>\n\n\n\n On the other hand, let\u2019s say you only put down 5% for your $300,000 home. Now, $15,000 is still a lot of money to lose if you can\u2019t continue to pay your mortgage. But losing $15,000 stings less than losing $60,000. Your lender, on the other hand, would be out $285,000. They’d have a deed to a property that\u2019s only worth just a little more than that. The lender would have to work harder to not lose money on the deal. So lenders use mortgage insurance to offset some of those potential losses.<\/p>\n\n\n\n For PMI, the exact costs depend on your credit score, how much you\u2019re borrowing, and how much you\u2019re putting down. Generally, PMI is about 1% of the original loan amount per year, spread out over your monthly mortgage payments.<\/p>\n\n\n\n So, if you\u2019re buying that $300,000 house with $15,000 down, you\u2019d be looking at around $238 a month in PMI payments (assuming a 1% rate).<\/p>\n\n\n\n FHA mortgages require a one-time upfront fee for mortgage insurance and <\/em>annual mortgage insurance premium payments, spread out over your monthly mortgage payments. <\/p>\n\n\n\n With conventional PMI, the exact costs vary based on your credit score. The costs for FHA mortgage insurance premiums are the same for all FHA borrowers.<\/p>\n\n\n\n Currently, FHA borrowers pay 1.75% upfront, and then between 0.45% – 1.05% annually, depending on the size of the down payment and the loan term. It\u2019s not an insignificant expense. That said, if a low-down-payment mortgage is the only way you can afford to purchase a home, the extra expense may well be worthwhile.<\/p>\n\n\n\n Good news for conventional mortgage borrowers: PMI doesn\u2019t last forever. After all, once you\u2019ve built some equity in your home, the risk goes down for your lender. You can build equity in your home by paying down the principal on your mortgage, or if your home\u2019s value increases.<\/p>\n\n\n\n Once your loan balance gets down to 80% of the original cost of your home, your lender has to cancel your PMI obligations if you ask them to. It pays to pay attention here. If you don\u2019t ask about it, the lender is only required to cancel the PMI bill on their own once the balance is under 78%. (Still, the lesson here: keep track of your loan balance and avoid paying more PMI than you have to pay.)<\/p>\n\n\n\n Now, some not-as-great news for FHA borrowers. If you finance more than 90% of the cost of your home\u2014and most FHA borrowers do\u2014your mortgage insurance premiums stick around for the duration of the loan. You\u2019ll pay mortgage insurance as long as you\u2019re paying that mortgage, well past the point at which you\u2019ll have built up significant equity in your home. To get rid of the expense of mortgage insurance on an FHA loan, you\u2019ll either need to refinance or pay off the mortgage.<\/p>\n\n\n\nWill I Need Mortgage Insurance?<\/h2>\n\n\n
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<\/figure><\/div>\n\n\nWhy Do Lenders Require Mortgage Insurance?<\/h2>\n\n\n
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<\/figure><\/div>\n\n\nWhat Does Equity Have to Do with Mortgage Insurance?<\/h2>\n\n\n\n
So How Much Does Mortgage Insurance Cost?<\/h2>\n\n\n
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<\/figure><\/div>\n\n\nHow Long Do I Have to Pay Mortgage Insurance?<\/h2>\n\n\n
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<\/figure><\/div>\n\n\nWhat\u2019s This I Hear About LPMI, or Lender-Paid Mortgage Insurance?<\/h2>\n\n\n
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