When taking out a mortgage loan, it is important to know all the costs you have to cover. Depending on what type of mortgage loan you are taking, this could include mortgage insurance too. 

‍

So, how does mortgage insurance work, when do you need to pay it, and how much does it cost? Keep reading for everything you need to know about mortgage insurance.

‍

How Does Mortgage Insurance Work?

Mortgage insurance is not the same thing as homeowner’s insurance.  Homeowner’s insurance protects the residence and provides liability coverage for the homeowner.  Mortgage insurance protects the mortgage lender and safeguards the lender if you default on your mortgage payment.

‍

Depending on the loan program, lenders may require mortgage insurance if your down payment is less than 20% or if you are refinancing, the loan-to-value is greater than 80%. This is folded into your monthly mortgage payments as part of your monthly escrow payment, so it’s important to budget for mortgage insurance if it will be required for your mortgage loan. 

‍

For a conventional mortgage, the lender selects the mortgage insurance firm and for a government loan (FHA, VA or USDA) the mortgage insurance is provided by the government entity, so you won’t be able to shop around for cheaper mortgage insurance.  The cost of mortgage insurance will vary by your downpayment %, your credit score and other factors.  

‍

Private Mortgage Insurance (PMI)

Private mortgage insurance (PMI) is required to obtain a conventional mortgage loan if the down payment is less than 20%. If a borrower is refinancing with a conventional loan and has less than 20% equity in their property, the lender may also require PMI. 

‍

Government Loan Mortgage Insurance

For loan programs under FHA, VA and USDA, the government entity provides mortgage insurance.  The amount and duration of the mortgage insurance varies by entity.

‍

Pros And Cons Of Mortgage Insurance

‍

Pros

‍

Saves Time

Saving for a 20% down payment could take years. Mortgage loan insurance allows you to put as little as 5% down on a property – this means you can become a homeowner easier and faster.  In a refinance situation, it allows lenders to consider higher loan-to-values with the assurance of mortgage insurance coverage.

‍

Saves Money

It may seem counter-intuitive as mortgage insurance adds to your expenses, but there are some ways that it can actually save you money in the long run.

‍

Without mortgage insurance, you’d be required to save up for a 20% down payment or have a loan-to-value of 80% or less – this can take years. By the time it’ll take you to save up enough money, home prices and other expenses could have increased. In addition to this, you will keep spending money on rent. 

‍

But with mortgage insurance, you can pay as little as 5% on your down payment. This makes it easier to become a homeowner.

‍

Cons

‍

Increases Monthly Payments

The mortgage insurance premium is one of the most significant disadvantages of mortgage insurance. Mortgage insurance premiums are paid with your monthly mortgage payment, as part of your monthly escrow payment, which increases how much you have to pay every month.  

‍

Protects The Lender Only

Mortgage insurance doesn’t protect the borrower in case they default on their loan. It protects the lender from most losses in case the borrower defaults on the mortgage loan.

‍

How Is Mortgage Insurance Calculated?

Mortgage insurance companies determine your PMI rate based on your credit score, down payment amount, and credit history.   Your lender will submit your application to their mortgage insurance company, who will then respond with an approval and your mortgage insurance premium amount.  You will pay the mortgage insurance premium to your lender who will in turn remit the premiums to the mortgage insurance company. 

‍

Government mortgage insurance rates are determined by the government entity:

‍

• VA has an upfront funding fee only – no monthly premiums
• FHA has an upfront mortgage insurance premium and monthly insurance premiums that will continue for 11 years or the life of the loan
• USDA has an upfront mortgage insurance premium and monthly mortgage insurance premiums that will continue for the life of the loan

How To Save Money On Mortgage Insurance

‍

Make A Down Payment Of 20%

Some mortgage loan programs allow you to get a mortgage with a modest down payment and no mortgage insurance. However, to avoid mortgage insurance, you'll need to secure a conventional loan and pay down at least 20% on a home.

‍

Opt For Other Loan Types

Conventional mortgage loans require mortgage insurance when your down payment is below 20%. If you want to avoid PMI even with a low down payment, there are other loan types that don’t require mortgage insurance.  Talk to Wesley Mortgage to see if other programs that do not require mortgage insurance will be available for you.

‍

Conclusion

If your mortgage down payment is less than 20% or if you loan-to-value is greater than 80%, then you may be required by your lender to get mortgage insurance. While this can increase your costs, it allows you to secure a loan with less cash for a down payment, so you can start on your homeownership journey right away.

‍

Want to take advantage of mortgage insurance or have questions about whether it’s right for you? Contact Wesley Mortgage to learn about your options!

‍