What is Mortgage Insurance?

Mortgage insurance, or Private Mortgage Insurance (PMI), should not be confused with homeowners insurance or hazard insurance.

----Mortgage insurance is a policy that benefits mortgage lenders in the event they have to incur the costs of a foreclosure on a property.

----Mortgage insurance is generally required when the borrower puts less than 20% down on the property, due to the lender’s increased risk in providing such a loan. The borrower pays the premium on a monthly basis as part of their mortgage payment. The mortgage insurance premium is then sent to a mortgage insurance company. If the borrower defaults and the lender forecloses on the property, the mortgage insurance company will pay a portion of the loan amount to the lender.

---The premium amount depends on many variables, such as the credit score of the borrower, the property type, location, current market conditions, etc. For conventional loans, the range is generally from about .7% to 1.05%. Additionally, borrowers need to pay an upfront premium due at closing in the amount of 1% of the loan amount.

----The FHA is essentially a public mortgage insurance company. For an FHA loan with a minimum down payment of 3.5%, the annual mortgage insurance rate is around 1.15%. Many borrowers are willing to pay more for mortgage insurance by applying for an FHA loan because FHA loans offer better interest rates and less rigid credit and income requirements than conventional loans.

---Once your equity rises above 20%, either through paying down your mortgage or through appreciation, you could be eligible to stop paying mortgage insurance. You will have to contact your lender, and they will want proof that your equity position is secure and exceeds 20%. Proof is generally obtained through an independent appraisal, and may cost between $350 and $500.

---FHA rules are different, however. If you have an FHA loan, you will need to pay down your mortgage to 78% of your original sales price. Appreciation isn’t taken into consideration for FHA loans.

---Mortgage insurance has allowed many buyers the ability to purchase a home with less than 20% down, which also helps our struggling housing market.