What is Mortgage Insurance?
Mortgage insurance is required when at least 20 percent of a home’s purchase price is not provided as a down payment. Basically, mortgage insurance protects lenders against homeowner defaults and encourages lenders and investors to make funds available for mortgage lending purposes. Without mortgage insurance, most home buyers would not have access to low down payment mortgage loan programs.
Types of Mortgage Insurances
Mortgage insurance differs by loan program. Conventional mortgages have private mortgage insurance (PMI) and FHA loans have mortgage insurance premiums (MIP).
PMI, or private mortgage insurance, is typically available in a variety of premium plan structures and offers payment options that can usually be tailored to the borrower’s needs. There are a number of private mortgage insurance providers and each structure their offerings a bit differently. Borrowers can typically cancel PMI after reaching 20 percent equity in your home.
FHA mortgage insurance premiums or MIP, are administered by the government. FHA insured loans require an up front mortgage insurance premium (UFMIP) as well as an annual premium (usually billed monthly). Unlike PMI, FHA mortgage insurance premiums are required for the life of the loan.
FHA or Conventional Loans?
While putting down a larger down payment (20%) on your dream home can help you avoid the issue of mortgage insurance all together – many people are not in the position to do so. Since both FHA and conventional mortgage loans offer low down payment options, borrowers often make their decisions based on the mortgage insurance requirements. In fact, changes to FHA mortgage insurance requirements have made conventional loans increasingly attractive to home buyers.