Mortgage Insurance

Private mortgage insurance (PMI) is a type of insurance that a lender may require a borrower to purchase as a condition of a mortgage. This insurance lowers the risk to the lender when offering a loan to a borrower. Most lenders require PMI when a homebuyer makes a down payment of less than 20% of the home’s purchase price. Mortgage insurance allows borrowers to qualify for a loan that they may not have otherwise been able to secure.

Mortgage insurance ultimately protects the lender in the event that the borrower falls behind on their payments. If a borrower does fall behind, it may affect their credit score and may cause home foreclosure. Mortgage insurance will increase the cost of your loan as the insurance payment will be included in your total monthly payment.

Loan Types that Require Mortgage Insurance

• Conventional Loans - Private mortgage insurance rates will vary by down payment amount and credit score.
• FHA Loans - Mortgage insurance is required for all FHA loans. It costs the same no matter your credit score, but may increase depending on your down payment amount.
• USDA Loans - Mortgage insurance is required but normally cheaper than other loan types. Paid at closing and as part of your monthly payment.
• VA Loans - No monthly insurance premium. Instead, an upfront “funding fee” will be required. The fee varies based on your type of service, down payment amount, disability status, whether you are buying or refinancing, and whether this is your first VA loan.

In Conclusion

Mortgage insurance ultimately increases the cost that borrowers have to pay on a monthly basis, but it does enable borrowers to become homeowners sooner by reducing their risk to lenders. Homeowners insurance is a worthwhile option for borrowers with a smaller down payment who want to own a home quickly.