Mortgage insurance is an insurance policy that protects a mortgage lender or title holder in the event that the borrower defaults on payments or is otherwise unable to meet the contractual obligations of the mortgage. Typically, borrowers making a down payment of less than 20% of the purchase price of the home will need to pay for mortgage insurance. Mortgage insurance also is typically required on FHA and USDA loans. If required to pay mortgage insurance, it will be included in the total monthly payment, in the costs at closing, or both. Depending on the loan, mortgage insurance is paid for in different ways:
With a Conventional loan
, the lender may arrange for mortgage insurance with a private company. Private mortgage insurance (PMI) rates vary by down payment amount and credit score but are generally less expensive than FHA rates for borrowers with good credit. Most private mortgage insurance is paid monthly, with little or no initial payment required at closing. Under certain circumstances, PMI can be canceled.
With a Federal Housing Administration (FHA) loan
, mortgage insurance premiums are paid to the Federal Housing Administration (FHA). FHA mortgage insurance is required for all FHA loans. It costs the same no matter one’s credit score, with only a slight increase in price for down payments less than five percent. FHA mortgage insurance includes both an upfront cost, paid as part of the closing costs, and a monthly cost, included in the monthly payment.
If a buyer does not have enough cash on hand to pay the upfront fee, they are allowed to roll the fee into their mortgage instead of paying it out of pocket. If they do this, their loan amount and the overall cost of their loan will increase.
With a US Department of Agriculture (USDA) loan
, the program is similar to the Federal Housing Administration, but typically less expensive. One will pay for the insurance both at closing and as part of their monthly payment. Like with FHA loans, a buyer can roll the upfront portion of the insurance premium into their mortgage instead of paying it out of pocket, but doing so increases both their loan amount and their overall costs.
With a Department of Veterans Affairs (VA)-backed loan
, the VA guarantee replaces mortgage insurance, and functions similarly. With VA-backed loans, which are loans intended to help service members, veterans, and their families, there is no monthly mortgage insurance premium. However, a buyer will pay an upfront funding fee. The amount of that fee varies based on:
The type of military service
The down payment amount
The existence of any disability status
Whether it is a home purchase or home refinance
Whether this is the buyer’s first VA loan, or they have had a VA loan before
Like with FHA and USDA loans, one can roll the upfront fee into their mortgage instead of paying it out of pocket, but doing so increases both their loan amount and their overall costs.