How Does Mortgage Insurance Work? Basics of Mortgage Insurance Premiums

Key Takeaways

  • Unlike other types of insurance, mortgage insurance only protects the lender
  • Mortgage insurance is typically required when a borrower has less than a 20 percent down payment on conventional loans
  • All FHA loans require mortgage insurance
  • Mortgage insurance is based on the “premium rate” determined by your lender

Although it sounds like mortgage insurance protects you in the same way that your car, home, or health insurance would, it actually protects the lender. Mortgage insurance raises your monthly mortgage payment which makes it less appealing for borrowers.

However, mortgage insurance makes it possible for these same borrowers to get approved for mortgages they otherwise would not be able to afford, making mortgage insurance a small price to pay to get the home of your dreams.

This article will dive into mortgage insurance, how it works, and whether or not you’ll have to pay it on your next home loan.

How Mortgage Insurance Works

Borrowers that come to closing with less than 20 percent as their down payment will likely need to pay monthly mortgage insurance. The reasoning behind monthly mortgage insurance is for the government to continue to issue loans to first-time homebuyers and those that wouldn’t qualify for other loan programs. 

However, you may come across several types of mortgage insurance when receiving quotes from lenders. 

Private mortgage insurance (PMI)

First, conventional mortgage insurance (sometimes called PMI) is typically only for borrowers with an 80 percent loan-to-value (LTV) ratio, meaning less than a 20 percent down payment at closing. Conventional mortgage insurance automatically cancels once you reach 78 percent LTV, with the option of also canceling at 80 percent.

FHA mortgage insurance premiums (MIP)

The Federal Housing Administration (FHA) is a government agency whose goal is to help first-time home buyers and underqualified borrowers to enter the real estate market and increase homeownership in America. They issue mortgage insurance premiums (MIP) on their loans to protect themselves against the risk of lending to new and underqualified borrowers.

Mortgage Insurance FAQs

How do you calculate mortgage insurance?

Mortgage insurance is typically determined by your lender who uses a premium rate of 0.5 to 1 percent depending on your credit profile, down payment, and other current loans. When determining the mortgage insurance on your next property, using 1 percent as your premium rate is a safe bet.

How long does mortgage insurance last?

If you’re issued an FHA loan, mortgage insurance lasts for the entire life of the loan unless you refinance into a conventional mortgage or a few other special circumstances. Mortgage insurance isn’t required for Veterans Administration (VA) loans which cater to military members and their spouses.

What is mortgage title insurance?

Mortgage title insurance (or simply “title insurance”) protects the buyer and seller from financial loss due to title issues in the home-buying process. Common title issues include unknown liens on the property and public record errors.

Find out why Kaya Homes is the leader in Long Island real estate and are your go-to realtor in the Lynbrook, Oceanside, Malverne, Hewlett, Valley Stream, East Rockaway, Woodmere, Cedarhurst, Hewlett Harbor, and Freeport area.


Fri, 02 Sep 2022 23:12:35 +0000

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