If you're a first-time home buyer, once you delve into the loan process, you might begin to feel like there are all sorts of hidden fees and factors that no one told you about before. There are the more obvious expenses, like the downpayment and closing costs, and then things you might not have considered before now, like mortgage insurance.
What is mortgage insurance?
Mortgage insurance is often required by lenders, especially if you’re putting down a relatively low downpayment in comparison to the home's price. It lowers the lender's risk that you might not pay back your full mortgage balance, and agreeing to having it can help you qualify for a good loan.
Things to Note
There are some important things to keep in mind when you are looking for mortgage insurance:
- No matter what, mortgage insurance is always in place to protect the lender from default. If you fall behind, your credit score will still decrease and you could still lose your home in a foreclosure.
- A conventional loan is likely to lead your lender to getting PMI, or Private Mortgage Insurance. The rates of PMI vary depending on your credit score and downpayment.
- Most mortgage insurance plans don’t require an amount to be paid at closing, but you’ll have to pay it monthly (typically, the cost is factored into your mortgage payment).
- An FHA loan will mean that your mortgage insurance is handled through the FHA directly. They require mortgage insurance on all of their loan programs, and you’ll be required to pay an upfront fee and a monthly fee.
- A USDA loan will require a mortgage insurance plan similar to that of an FHA loan. There’ll be a cost at closing, and a fee factored into your monthly payment.
Piggyback Second Mortgages
Some lenders market "piggyback" second mortgages as an alternative to mortgage insurance. They may advertise this option as being cheaper, but it could actually cost you more. Always compare total costs before you make up your mind on what's right for you.