What is Mortgage Insurance?

You’re thinking of buying a house and a lot of terms are being thrown around and your lender assumes you know what they all mean.  Well one of the terms that is often confusing is “Mortgage Insurance” which is often referred to as “PMI” (private mortgage insurance).   In the lender’s world, Mortgage Insurance is abbreviated to “MI”.   PMI (private mortgage insurance) is one form.

OK so what is it?  

MI (mortgage insurance) is what enables a home buyer to purchase with less than 20% down.    In banking terms, a secure loan is one where the buyer puts 20% down.  But many, if not most, first time buyers don’t have that kind of money saved.   MI protects the lender by insuring what the buyer didn’t put down.  If the buyer puts 5% down the mortgage insurance is covering the other 15%.  If the buyer puts 10% down the mortgage insurance is covering the other 10%.    The insurance only comes into play if the buyer ends up defaulting on the loan.

Some folks think that MI may help them with their payments if they lose their job or have trouble.  However it only benefits the lender.

There are several private companies that offer this insurance.   The cost of the MI will vary depending on credit score, loan type, property type and down payment.

Mortgage insurance can also come from the government:  FHA (Federal Housing Administration), RD (Rural Development) and VA (Veteran’s Administration) each have their own form.

Mortgage insurance can be paid monthly or paid upfront in a one time fee (either paid in cash at closing or added to the loan balance).   Sometimes the insurance can be rolled into the rate.  In the case of FHA and RD, there is an upfront and monthly MI fee.   Your lender can help you identify the option that is best for you.

For conventional loans with private mortgage insurance, the insurance can be removed at some point.  Click here to read about removing mortgage insurance.

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