What is mortgage insurance? Learn the pros and cons
Unsure if you need mortgage insurance? Here's everything you need to know, including how it works and the pros and cons of this type of coverage. Keep reading to find out.
Mortgage insurance explained
Mortgage Insurance has become a staple in the home-buying process for many people in the U.S. But what is mortgage insurance? And why do so many people have it?
Here we’ll explain everything your need to know, including the pros and cons of having it and who should consider getting one. Let’s get started.
What is mortgage insurance and what does it cover?
When buying a home, one of the big expenses you’ll have to consider is the mortgage. And once you’ve got that mortgage, you’ll have to consider insurance.
As the name might suggest, mortgage insurance is a type of insurance that will secure the lender’s payment even if you can’t make your monthly payments.
One thing people might be confused about is who this insurance protects. Differently from what everyone may think, it was designed to protect the lender, not you.
This reassures that the lender or titleholder is protected if the borrower defaults on payments, passes away, or cannot meet the mortgage’s contract. This way, you won’t lose your home.
Usually, it is required when the borrowers put down less than 20% of the property value on a conventional loan. Also, it is typically required for FHA and USDA loans.
In most cases, it will be included in your monthly payments, and you might be paying for some time.
But is it the right option for you? Below we compared the pros and cons of mortgage insurance to help you find out. Let’s take a look.
- It helps you to purchase a home sooner;
- It will allow you to make lower down payments;
- It ensures stability to the lender, helps you to close your mortgage;
- It involves lower mortgage risks in general;
- The insurance is temporary; it can be canceled with time;
- Borrowers can get competitive and lowers rates.
- It will protect the lender, not you;
- It will add an extra amount to your monthly payments;
- You’ll need to pay interest alongside the insurance;
- Canceling the insurance might be difficult.
How much will you pay for mortgage insurance?
The costs of insurance will depend on multiple factors. It includes its type, whether you have fixed or adjustable rates, down payment, credit score, home value, and more.
As a result, if you have a lower credit score and put down as little as 3% of the property price, you might be paying higher for your mortgage insurance.
Usually, borrowers can expect to pay 1% up to 2% of the loan amount annually.
How long do you pay for mortgage insurance?
The good news about mortgage insurance is that you don’t have to pay it throughout the loan’s entire life.
Mortgage plans vary, but in most cases, you can cancel your mortgage insurance once you’ve paid more than 20% of the home loan amount.
So it might take two to eleven years. It will depend on your home loan conditions.
Most lenders might remove it when you’ve achieved 22% equity.
We recommend looking ahead to find out when this will be so that you don’t end up paying unnecessary premiums for a home loan with PMI included.
Types of mortgage insurance
There are different types of mortgage insurance, and it can be difficult to decide which type is right for you. Here’s a quick overview of three of them.
Borrower-Paid Mortgage Insurance
This is the most common type of mortgage insurance for conventional loans. As the name suggests, in this case, the borrower will pay the insurance monthly.
This premium will remain in the monthly payment until you’ve invested 20% equity in the property, at which point you can refinance out of the PMI.
As a result, you’ll be paying up to 1% of your loan amount yearly.
Lender-Paid Mortgage Insurance
Also commonly used for conventional loans, lender-paid mortgage insurance allows borrowers to waive the monthly premium in exchange for a slightly higher interest rate.
There, the lender will pay for your insurance initially. Nevertheless, the overall monthly payment on a loan with this type of insurance will be lower than the borrower paid.
Also, you can make a lower down payment on your mortgage.
FHA Mortgage Insurance Premium
Government-backed loans might also require mortgage insurance, in this case, called mortgage insurance premium (MIP).
The MIP will be paid throughout the home loan unless you make a down payment of at least 10% of the property value.
Firstly, the MIP will be paid through an upfront mortgage insurance premium (UFMIP) of 1.75% of the base loan amount.
Further, you’ll be paying for the insurance premium, which will cost up to 1.05% of the loan base amount.
Can you cancel or avoid mortgage insurance?
Yes! Getting rid of the insurance will depend on your home loan insurance type. By making your mortgage payments, you’ll have to acquire 20% for conventional loans.
Therefore, you can cancel your mortgage insurance if your home’s value rises enough to give you 25% equity and if you have paid your mortgage insurance for two years.
You can also cancel it if your property’s value goes up enough to give you 20% equity and you’ve paid premiums for at least five years.
And if you reach 20% faster than you would have by putting extra payments toward your loan’s principal.
When you cancel your mortgage insurance for an increase in home value, the lender may require an appraisal to verify that they’ll get a full return on their investment.
Also, they’ll want current payments and good payment history before canceling at this point.
When it comes to avoiding it, the easiest way is to put down at least 20% on your mortgage.
And if you don’t have enough to put that much down, try saving up for a larger down payment, and buying the property later.
Additionally, when searching for a lender, look for special programs for first-time homebuyers to help you avoid it.
Furthermore, if you’re qualified for a VA loan, you can waive it since it doesn’t charge insurance.
So, now that you’ve learned what mortgage insurance is and its many details, it’s time to word. Start by evaluating your needs and whether insurance makes sense for you.
If it does, get a quote from one of your trusted providers and see how much protection you could gain!
Lastly, we have another great article to help you make a more informed decision regarding mortgages.
Keep reading to learn key mortgage terms that might help your homebuying journey. Let’s get started.
About the author / Beatriz Vieira
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