When is Mortgage Insurance Required?

Buying a house is an exciting milestone, but it can also be overwhelming. One of the most important decisions you will make when purchasing a home is deciding whether or not to purchase mortgage insurance. In this article, we will explore what mortgage insurance is, when it is required, and how it can affect your finances.

What is Mortgage Insurance?

Mortgage insurance is a type of insurance that protects lenders from financial losses if borrowers default on their loans. There are two types of mortgage insurance: private mortgage insurance (PMI) and mortgage insurance premium (MIP).

PMI is required for conventional loans with a down payment of less than 20% and is usually provided by private mortgage insurance companies. MIP, on the other hand, is required for FHA loans and is paid to the Federal Housing Administration (FHA).

Private Mortgage Insurance (PMI)

If you are taking out a conventional loan with a down payment of less than 20%, you will be required to purchase PMI. PMI premiums vary depending on the size of your down payment and your credit score. The higher your down payment and credit score, the lower your PMI premium will be.

PMI is usually required until you have paid off 20% of your home loan or the loan-to-value (LTV) ratio drops below 80%. LTV is the amount of the loan compared to the value of the property. For example, if you purchase a home for $200,000 and put down 10%, your loan amount would be $180,000 and your LTV would be 90%.

To calculate when you will reach the 20% threshold, divide the original loan amount by 80%. Using the example above, if your loan amount is $180,000, you will need to pay down your loan to $160,000 before you can request to have PMI removed.

Mortgage Insurance Premium (MIP)

MIP is required for FHA loans, which are government-backed loans designed to help first-time homebuyers with low-to-moderate income and credit scores. MIP is a fee that is paid directly to the FHA and is used to fund the program.

The amount of MIP you pay depends on the size of your down payment and the length of your loan term. The higher your down payment and the shorter your loan term, the lower your MIP premium will be.

Unlike PMI, MIP is required for the entire life of the loan, regardless of the loan-to-value ratio. However, if you put down more than 10% on your FHA loan, you may be eligible to have your MIP removed after 11 years.

When is Mortgage Insurance Required?

Mortgage insurance is required when you take out a home loan with a down payment of less than 20%. The amount of mortgage insurance you will pay depends on the type of loan you have and the size of your down payment.

It is important to note that mortgage insurance is not the same as homeowners insurance. Homeowners insurance protects your home and personal property from damage or theft, while mortgage insurance protects your lender in the event that you default on your loan.

FAQs

Conclusion

Mortgage insurance is an important consideration when purchasing a home. It is required for loans with a down payment of less than 20% and can affect the overall cost of your loan. Understanding how mortgage insurance works and when it is required can help you make informed decisions when purchasing a home.