If you’re planning to purchase a home, but need to make a down payment that’s less than 20 percent of the purchase price, you will likely need to pay mortgage insurance (MI) as part of your mortgage. The type of loan you get and your credit score will both impact how much this cost will be, but understanding MI and how it affects your loan is an important part of finding the right mortgage.
What Is Mortgage Insurance and Why Do Lenders Require It?
Historically, lenders have asked home buyers to put 20 percent of the home’s price down as a down payment. They have found that borrowers who can save this much are in a good position to repay the mortgage. In addition, with a 20 percent down payment, the lender has less to lose if you do default.
If you can’t put 20 percent down on the home, the lender takes on more risk. Mortgage insurance policies protect the lender against the risk of your default. In exchange for lending you the money, they will ask that you pay an MI premium to buy them this protection.
How Do You Pay Mortgage Insurance?
The way you pay MI premiums varies based on your loan program. Typically, it’s an added fee that you pay when you pay your monthly loan amount. However, some lenders allow borrowers to pay the fee upfront at closing, and others allow borrowers to pay a higher interest rate and forgo the monthly payment.
These MI payments may last for the life of the loan. However, it’s more common for them to last for a specific duration or until the loan-to-value ratio reaches a certain point. Often once you’ve surpassed the 80 percent mark in loan-to-value ratio, it either disappears or you can refinance to remove it.
Mortgage Insurance for Common Loan Types
Each loan is different, but these loan types tend to handle mortgage insurance in the same way:
- Conventional Loan – This type of loan has the greatest potential variety because it is up to the lender. Most charge private mortgage insurance (PMI) as an annual fee of 0.55 to 2.25 percent of the loan amount, divided into monthly payments. Once the loan reaches 80 percent loan-to-value, you can reach out to the lender to learn what your options are to get rid of the PMI charge.
- FHA Loan – FHA mortgage insurance is divided into two parts. First, you will pay an upfront premium of 1.75 percent of the loan amount. Then, you will be responsible for an annual premium that is 0.45 percent to 1.05 percent of the outstanding balance annually, divided into a monthly fee. To get rid of the fee, you’ll need to refinance, unless your down payment was 10 percent or more. In that case, the fee disappears after 11 years.
- USDA Loan – The USDA home loan is one of the few loans that let you borrow with no money down. Like the FHA loan, it has two mortgage insurance fees. The first is a 1 percent upfront fee, and the second is an annual fee that is 0.35 percent of the loan amount, divided into monthly payments. Like the FHA loan, the only way out is to refinance the loan.
- VA Loan – The VA home loan lets eligible veterans borrow with no money down. It requires no mortgage insurance. However, you will pay a funding fee at closing. The funding fee is 1.25 to 3.3 percent of the home loan amount.
Get Help Finding the Right Loan Option
Mortgage insurance can be a confusing topic. Many loans require it, but the way it’s charged varies significantly. If you’re shopping for a mortgage, getting expert advice is helpful. Contact Mid America Mortgage for help. Our mortgage professionals will help you figure out all of the details to find the loan that best fits your needs.
