Mortgage insurance allows homebuyers to choose an affordable down payment on their home. It also makes it possible for homebuyers to find low-interest loans. For these conditions, homebuyers pay a monthly premium for mortgage insurance.
But what is mortgage insurance, exactly? Here’s a basic guide to mortgage insurance and how it fits into the real estate world:
What is mortgage insurance?
Mortgage insurance is a type of insurance paid by a loan borrower. It protects the lender in the case the borrower defaults on the loan. This protection gives mortgage lenders the chance to invest with borrowers who usually wouldn’t qualify for these loans.
Loan borrowers utilizing standard loans with a down payment under 20% pay for a private mortgage insurance (PMI). This is the case both for traditional mortgages and those offered by the Federal Housing Administration (FHA).
The difference between private mortgage insurance & mortgage insurance premiums
PMI is required for standard loan recipients paying less than 20% on their home down payment. PMI provides protection for lenders when a potential borrower is considered a greater risk due to debt-to-income ratio, credit score or other financial factors.
Mortgage insurance premiums are a requirement for those with FHA backed mortgage loans as well as traditional loans. FHA approved lenders require borrowers to pay for this insurance for protection in the case of defaulting on the loans. This allows lenders to work with borrowers who otherwise might not qualify for a loan, while also protecting their own interests.
What types of mortgage insurance are there?
There are 4 major mortgage insurance types:
- Lender paid: The mortgage insurance premium is wrapped into the regular mortgage payment through higher orientation fees or interest rates.
- Borrower-paid monthly: A standard monthly premium is paid by the borrower for the mortgage insurance.
- Split premium: A portion of the mortgage insurance is paid up front and the rest is paid in a monthly premium.
- Borrower-paid single premium: The full cost is paid up front by the borrower at the home closing.
Mortgage insurance may seem like a hassle. While it is an extra monthly bill, it allows a larger number of individuals the opportunity to qualify for mortgage loans. If you don’t have to pay 20% on your down payment if you’re willing to pay a bit more for insurance, you have a much wider selection of home options and borrowing opportunities.
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