How to Know If You Need Private Mortgage Insurance

Not sure if you need private mortgage insurance or even know what it is? Mortgage insurance is a type of insurance that protects lenders in case borrowers default on their mortgage payments. It is a way for lenders to manage their risk and ensure that they will be repaid in the event that a borrower is unable to meet their financial obligations.

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

Private Mortgage Insurance (PMI)- This insurance is typically required by lenders when a borrower makes a down payment of less than 20% on their home purchase. This is because a down payment of less than 20% is considered a higher risk for lenders. A client with more equity presents less risk.

PMI premiums are usually paid monthly and are based on the size of the down payment, the loan amount, and the borrower’s credit score. The cost of PMI can range from 0.3% to 1.5% of the loan amount per year. PMI is typically required until the borrower has built up 20% equity in their home. This can be achieved through a combination of paying down the mortgage and appreciation in the value of the property.

Government mortgage insurance-  This insurance is provided by the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA). FHA loans are available to borrowers with a down payment as low as 3.5% and VA loans are available to eligible military service members and veterans.

FHA loans require mortgage insurance premiums (MIP) for the life of the loan, regardless of the amount of equity in the property. The cost of MIP depends on the size of the down payment, the loan amount, and the term of the loan.

VA loans do not require mortgage insurance, but they do require a funding fee that can be financed as part of the loan. The funding fee varies depending on the borrower’s military service status, down payment amount, and loan type.

Do You Need Mortgage Insurance?

If you are able to make a down payment of 20% or more, you will not need to pay for mortgage insurance. This can be a significant cost savings over the life of the loan.

VA loans do not require mortgage insurance, but they do require a funding fee.

If you are able to qualify for an FHA loan, you will be required to pay for mortgage insurance for the life of the loan. However, if you are able to refinance your loan in the future and build up 20% equity in your home, you may be able to eliminate the mortgage insurance requirement.

Mortgage insurance is a way for lenders to manage their risk and protect themselves in case of borrower default. Putting down a bigger down payment presents less risk to lenders. It’s important to understand the costs associated with mortgage insurance and to work with a trusted mortgage professional to determine the best option for your individual needs. Reach out to us today!