Mortgage insurance lower risk for lenders and helps borrowers qualify for loans. If you’re buying a home, there are essentials you should know.

Why Mortgage Insurance Exists

Mortgage insurance protects the lender. It acts as a safety net in case the borrower defaults on the loan.

Without private mortgage insurance, many borrowers wouldn’t qualify for financing. With insurance, however, lenders are more willing to approve mortgages with smaller down payments.

When Do You Pay Mortgage Insurance? 

With conventional loans, lenders usually require private mortgage insurance (PMI) until you have 20% equity in your home. Once you reach 20% equity, you can request cancellation.

By law, lenders must terminate PMI at 22% equity, based on the original property value and the original amortization schedule. Making extra payments to reach 22% early doesn’t automatically cancel PMI, but you can still ask.

Government-Backed Loans

  • FHA Loans: Always require mortgage insurance. If you put down 10% or more, you’ll pay insurance for 11 years. With less than 10% down, you’ll pay insurance for the life of the loan.
  • VA Loans: Never require mortgage insurance. Instead, they come with a one-time funding fee (1.25% to 3.6% of the loan amount), which can be rolled into the mortgage.

Conventional Loan (PMI) Insurance Cost 

Costs vary by loan type, credit score, and down payment size. For a conventional loan, PMI typically costs between 0.5% of the loan amount annually. On a $300,000 loan, that could mean $125 to $375 per month.

FHA Loan (UFMIP + MIP) Insurance Cost 

Borrowers pay two mortgage insurance premiums.

  •  Upfront Mortgage Insurance Premium (UFMIP): This one-time fee of 1.75% of the loan amount is typically rolled into the loan balance at closing. For a $300,000 FHA loan with a 3.5% down payment and a 30-year term, it would be $5,250.
  • Annual Mortgage Insurance Premium (MIP): This ongoing cost is commonly around 0.55% of the loan balance. On a $300,000 loan, that’s about $137 per month in the first year, with the
    amount gradually declining as the balance is paid down.

How to Avoid Mortgage Insurance

  • Put at least 20% down: With a conventional loan, this typically removes the insurance requirement.
  •  Lender-paid mortgage insurance: The lender covers the premium, but you’ll pay a higher interest rate.
  • Piggyback loan: A second mortgage can cover part of your down payment so you meet the 20% threshold.

Understanding mortgage insurance is an essential part of the homebuying process. For guidance on insurance requirements and loan options, contact the Decker Group at (972) 591-3097 or connect with us online.