Mortgage insurance can be a confusing term in an already complex process of buying a home. What is it? Do you need it? Is it necessary for the length of your mortgage? These are just a few common questions homebuyers often have. Let’s get the answers you need to begin your homebuying process with confidence.
Mortgage insurance is additional coverage that protects the lender and helps you qualify for a loan that you may not have otherwise obtained. It covers the lender in the event you fall behind on your payments or default on your loan, which helps lower the lender’s risk while providing you with the mortgage you need to buy your home.
Mortgage insurance is required on most loans if you’re making a down payment that is less than 20% of the total appraised value of the home. This mortgage insurance payment can be taken care of in a few ways, including adding it into your monthly mortgage payment, which is typical, or adding it onto the closing costs at the end of the homebuying process. You can also do a little bit of both, paying some up front and the rest throughout the term of your loan.
Once you have paid off at least 20% of the loan, you can request to have mortgage insurance removed from your monthly payments. When your principal balance is less than 78%, it will automatically fall off your payments.
Mortgage insurance can also help with interest rates, by allowing you to more easily qualify for a loan with a lower down payment when you may not have otherwise qualified for that same rate.
Mortgage insurance is necessary for some home loans, but not all. It typically is required when utilizing a Federal Housing Administration (FHA) loan, which is a loan that can lower down payments and offer better interest rates. If your lender suggests a fixed-rate conventional loan, mortgage insurance can be arranged which will often give you cheaper rates based on your down payment and credit score. Most of these mortgage insurance payments are paid monthly, not at the time of closing, which may help your closing costs stay low.
Purchasing a home is already a big life event, so understanding the process should be easy. Be sure to visit with your mortgage banker, who can guide you through what type of loan is best for you and what you’ll need in terms of mortgage insurance.