Mortgage insurance is an insurance policy that covers lenders if you cannot pay back the principal cost of your mortgage. The cost of your mortgage insurance policy will vary depending on the type of mortgage insurance you buy, your credit score, the down deposit, if you want adjustable or fixed interest rate, and if you take a private or federally backed loan. And good news, not everyone is required to purchase mortgage insurance.
For example, some FHA loans and traditional mortgages will not require you to buy mortgage insurance if you put a minimum required down payment on the house. In many non-federally backed loans the amount is 20%. Some lenders and government programs may also not require mortgage insurance for lower down payments, but it all depends on your specific situation so it is important to shop around for a mortgage type and lender that can meet your needs.
And when you shop you’ll discover that there are multiple types of mortgage insurance.
The four most common mortgage insurance policies are:
- Lender Paid Mortgage Insurance (PMI) – Your lender will find a policy and pay the monthly balance and charge you for the fees. The interest rates are higher here but you get to pay the amount back over the length of your loan vs. larger amounts over a shorter time frame each month.
- Borrower paid mortgage insurance (BPMI) – This is where you pay monthly along with your mortgage. Your interest rates may be lower, but the monthly amount may be higher as you normally have to pay the amount back before your loan is finished.
- Federal Home Loan Protection Insurance (MIP) – This type of mortgage insurance only applies when you take an FHA loan and you are normally required to have a lower down deposit.
- Single Payment Premium (SPP) – You can buy a single payment premium policy where you pay the entire lump sum at once and not have to worry about monthly installments. By doing this you risk lowering the amount you could have paid if you ever decide to refinance your mortgage.
Now that you know mortgage insurance is not always required, lets learn about what mortgage insurance covers, who it protects and why lenders may require it.
Lenders roll the cost of mortgage insurance into your monthly premiums. While you cannot negotiate mortgage insurance rates, you can potentially lower your monthly mortgage insurance rates before closing on your home in the following ways:
- Increasing your credit score
- Putting more money down
- Taking out a second loan to cover 10% of the total principal
And good news, your lender must end your mortgage insurance policy when your principal balance reaches 78% of the original loan value. In addition, if you have an FHA loan, lowering your loan-to-value ratio to 78% will automatically cancel your mortgage insurance policy. You should also be aware that mortgage insurance is not for your protection.
Mortgage insurance covers lenders and not you. For this reason, you cannot choose your mortgage insurance policy, and only your lender can. Now that you know what mortgage insurance is, lets jump into what it covers, the types of mortgage insurance and all the other details you’re likely wondering about.
What Does Mortgage Insurance Cover?
Mortgage insurance covers lenders for a portion of the loan on your house if you cannot meet your monthly payments. A mortgage insurance policy provides protection for the lender, not for you.
What is the Difference Between Mortgage and Other Types of Insurance?
Unlike mortgage life insurance, which pays down your mortgage if you pass away, mortgage insurance will not cover the entirety of your loan. Since mortgage insurance does not cover the whole amount of your loan, it will also not protect your home from going into pre-foreclosure or foreclosure if you fail to meet your monthly payments.
In addition, mortgage insurance does not protect your home from title disputes like title insurance does. Unlike mortgage insurance which only protects the lender, title insurance protects both the lender and you from losing your home if someone makes a claim. Your title insurance policy will require the issuer to defend your title for you or your lender.
While all mortgage insurance policies provide the same protection for your lender, there are different types of mortgage insurance policies you and your lender can choose from.
The Types of Mortgage Insurance
There are five types of mortgage insurance policies. The reason we listed four above is because one of the types if very uncommon and you likely will not come across it while buying a home.
Borrower-Paid Private Mortgage Insurance (BPMI)
BPMI, is the most common type of private mortgage insurance. BPMI policies cover many conventional loans until the minimum down payment amount is met. BPMI payments tend to be rolled into your monthly mortgage payments and do have an end. They can also be cancelled which is good news for many people.
Single-Premium Mortgage Insurance (SPMI)
SPMI mortgage insurance policies can be paid in full at closing to lower your monthly premiums. The only downside is that you cannot get the amount that you paid in mortgage insurance back if you decide to refinance your home.
Split-Premium Mortgage Insurance
Split-premium insurance combines BPMI and SPMI policies into one. Under this policy, you will pay a portion of your private mortgage insurance at closing and you’ll pay the remainder throughout the loan in your monthly mortgage. As a result, split-premium mortgage insurance leads to lower monthly payments than a BPMI policy.
Lender-Paid Mortgage Insurance (LPMI)
Under an LPMI policy, your lender will pay for your mortgage insurance in exchange for a higher interest rate. And good news, you can potentially lower the costs if you refinance your mortgage so keep that in mind if the higher rates scare you at first.
Federal Home Loan Protection Mortgage Insurance (MIP)
MIP covers all federally backed home loans, including FHA loans, USDA loans, and VA loans, with a down payment requirement of less than 10% of the total loan. And an MIP policy can be cancelled after around 11 years if you maintain your monthly payments, or if you refinance. Talk to your lender to discover the options you have available.
And now you know what mortgage insurance is, that you will have to pay for mortgage insurance even though it does not benefit you, and the reasons why your lender may require you to have a mortgage insurance policy when you take a loan.