Insights, Mortgages & Renting

What Is Mortgage Insurance: The Simple Guide

flik eco finance personal what is mortgage insurance

What is mortgage insurance? This is a question that many people have when they are looking to buy a home. Mortgage insurance protects the lender in case you default on your loan. In this guide, we will provide a comprehensive overview of what mortgage insurance is and what it can do for you. We will also discuss the different types of mortgage insurance policies available and how to choose the right one for your needs.

What Is Mortgage Insurance?

Mortgage insurance is insurance that protects the lender in the event of a borrower defaulting on their home loan. Mortgage insurance is typically required when the down payment on a home is less than 20 percent of the purchase price.

How Does Mortgage Insurance Work?

Mortgage insurance protects the lender against loss if the borrower defaults on their loan. If the borrower does default, the mortgage insurer will pay the lender a claim equal to what is owed on the loan. Mortgage insurance does not protect the borrower; it only protects the lender.

When To Cancel Mortgage Insurance

Mortgage insurance is required until the borrower has paid down their loan to 78 percent of the original purchase price. At that point, the borrower can contact their lender and request that mortgage insurance be cancelled. The lender will then order an appraisal to confirm that the value of the property has not declined, and if it has, the borrower will need to pay down their loan to 78 percent of the new appraised value before mortgage insurance can be cancelled.

What Are The Different Types of Mortgage Insurance?

There are two types of mortgage insurance: private mortgage insurance (PMI) and government-sponsored mortgage insurance.

Private mortgage insurance is purchased by the borrower from a private company, and government-sponsored mortgage insurance is offered by the Federal Housing Administration (FHA), U.S. Department of Veterans Affairs (VA), and Rural Housing Service (RHS).

Mortgage Insurance Premiums (MIPs)

MIPs are paid by borrowers as part of their monthly mortgage payment. The amount of the MIP depends on the type of loan, the down payment, and the borrower’s credit score.

MIPs are required for FHA loans with a down payment of less than 20 percent, and for all VA and RHS loans.

Borrowers who have a down payment of more than 20 percent may choose to pay PMI in order to avoid paying MIPs.

Is Mortgage Insurance The Same as PMI?

No, private mortgage insurance (PMI) is a type of mortgage insurance you might be required to pay for if you have a conventional loan. Mortgage insurance is not the same as PMI, although they are both types of mortgage insurance.

How Much is Mortgage Insurance?

Mortgage insurance typically costs 0.05% to 0.35% of your loan amount per year. That means, on a $200,000 loan, you could pay as little as $100 or as much as $700 per year – or even more – in mortgage insurance premiums. The cost of mortgage insurance depends on several factors, including:

  • The size of your down payment
  • The term or length of your loan
  • The type of mortgage insurance (private vs. FHA)
  • Your credit score

Of course, the biggest factor in determining the cost of mortgage insurance is the size of your down payment. If you can put down 20% or more when you purchase your home, you'll likely avoid having to pay mortgage insurance altogether. But if you can't, mortgage insurance is a necessary evil that will help you get into the home of your dreams.

Is Mortgage Insurance Compulsory?

Mortgage insurance is typically required when the down payment on a home is less than 20 percent of the purchase price. The reason for this is that borrowers who make a small down payment are considered to be a higher risk for defaulting on their loan. Mortgage insurance protects the lender against this risk.

What Are The Benefits of Mortgage Insurance?

Mortgage insurance can help make homeownership more affordable by allowing borrowers to put down a smaller down payment. For example, a borrower who has a five percent down payment on a $200,000 home would need to come up with $10000. If that same borrower had PMI, they could potentially put down as little as three percent, or $6000.

Mortgage insurance can also help borrowers who might not otherwise qualify for a loan get approved. That's because the added security of mortgage insurance allows lenders to take on more risk when approving loans.

Of course, there are some downsides to mortgage insurance as well. The most obvious is that it can add to the monthly cost of homeownership. Borrowers with mortgage insurance will typically pay higher interest rates than those without, and the monthly premium for mortgage insurance can add up.

Another downside is that mortgage insurance does not protect the borrower. In the event of a default, the lender will still be able to foreclose on the home and recoup their losses. Mortgage insurance only protects the lender, not the borrower.

Despite these downsides, mortgage insurance can be a great benefit for borrowers who are looking to buy a home with less than 20% down.

What Does Mortgage Insurance Cover?

Mortgage insurance typically covers the lender for a percentage of the loan amount, in case of default. In most cases, mortgage insurance is required when the down payment is less than 20% of the purchase price. Mortgage insurance can be either private or public, depending on the insurer.

How Can You Avoid Paying Mortgage Insurance?

The best way to avoid paying mortgage insurance is to put down a 20 percent down payment when you purchase your home. If you do this, you'll avoid what's called private mortgage insurance (PMI).

Another way to avoid paying mortgage insurance is to choose a government-backed loan program like FHA or VA financing. These programs require what's called a Mortgage Insurance Premium (MIP), which is paid to the government rather than a private insurer. The premium is usually much lower than PMI, but it still exists.

Lastly, some lenders offer what's called lender-paid mortgage insurance (LPMI). With this type of policy, the lender pays the premium and raises your interest rate slightly to cover the cost. This is often the most expensive option, but it can be a good way to avoid PMI if you don't have the 20 percent down payment.

No matter what type of mortgage insurance you have, remember that it's there to protect the lender - not you. It's important to do your research and make sure you're getting the best deal possible. There's no reason to pay more than you have to!

Is Mortgage Insurance Tax Deductible?

The answer to this question is a little complicated. Mortgage insurance is only tax deductible if you are self-employed. If you are an employee, the mortgage insurance premiums are not tax deductible.

Can You Get a Refund on Mortgage Insurance?

If you're asking yourself this question, then the answer is most likely no. Mortgage insurance is generally non-refundable, but there are a few exceptions. If you have what's called "private mortgage insurance" (PMI), then you may be able to cancel it once you've reached at least 20% equity in your home.

However, there are usually strict requirements and timelines that must be met in order for this to happen.

If you have what's called "government-sponsored mortgage insurance" (such as FHA mortgage insurance or VA mortgage insurance), then it's highly unlikely that you'll ever be able to cancel it.

This type of mortgage insurance is required for the life of the loan, regardless of how much equity you build up. The only way to get rid of it is to refinance into a non-insured loan.


About Jermaine Hagan (The Plantsman)

Jermaine Hagan, also known as The Plantsman is the Founder of Flik Eco. Jermaine is the perfect hybrid of personal finance expert and nemophilist. On a mission to make personal finance simple and accessible, Jermaine uses his inside knowledge to help the average Joe, Kwame or Sarah to improve their lives. Before founding Flik Eco, Jermaine managed teams across several large financial companies, including Equifax, Admiral Plc, New Wave Capital & HSBC. He has been featured in several large publications including BBC, The Guardian & The Times.

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