What is mortgage insurance and how does it work?
Mortgage insurance lowers the risk to the lender of making a loan to you, so you can qualify for a loan that you might not otherwise be able to get.
Typically, borrowers making a down payment of less than 20 percent of the purchase price of the home will need to pay for mortgage insurance. It is also typically a requirement on FHA and USDA loans. If you have to pay mortgage insurance, it is included in your total monthly payment that you make to your lender, your costs at closing, or both.
There are several different kinds of loans available to borrowers with low down payments. Depending on what kind of loan you get, you’ll pay for mortgage insurance in different ways:
Conventional Loan
If you get a conventional loan, your lender may arrange for mortgage insurance with a private company. Private mortgage insurance (PMI) rates vary by down payment amount and credit score but are generally cheaper than FHA rates for borrowers with good credit. Most private mortgage insurance have monthly payments, with little or no initial payment at closing. Under certain circumstances, you can cancel your PMI.
Federal Housing Administration (FHA) Loan
If you get a Federal Housing Administration (FHA) loan, you pay your mortgage insurance premiums to the Federal Housing Administration (FHA). FHA mortgage insurance is a requirement for all FHA loans. It costs the same no matter your credit score. There’s only a slight increase in price for down payments less than five percent. FHA mortgage insurance includes both an upfront cost, paid as part of your closing costs, and a monthly cost, included in your monthly payment.
If you don’t have enough cash on hand to pay the upfront fee, you can roll the fee into your mortgage instead of paying it out of pocket. If you do this, your loan amount and the overall cost of your loan will increase.
US Department of Agriculture (USDA) Loan
If you get a US Department of Agriculture (USDA) loan, the program is similar to the FHA, but typically cheaper. You’ll pay for the insurance both at closing and as part of your monthly payment. Like with FHA loans, you can roll the upfront portion of the insurance premium into your mortgage. By doing so, you don’t pay out of pocket. Doing so increases both your loan amount and your overall costs.
Department of Veterans’ Affairs (VA) Loan
If you get a Department of Veterans’ Affairs (VA)-backed loan, the VA guarantee replaces mortgage insurance, and functions similarly. VA-backed loans are loans intended to help service members, veterans, and their families. There is no monthly mortgage insurance premium.
Second Mortgage
When using a second “piggyback” mortgage,the loans have a different structure. For example, the same borrower might pay for the home with: a 10 percent down payment, 80 percent main mortgage, and a 10 percent “piggyback” second mortgage. The borrower is still borrowing 90 percent of the value of the home, but the main mortgage is only 80 percent. The “piggyback” second mortgage typically carries a higher interest rate, which is also often adjustable.
Contact us if you have any questions or your like to know what you what your financial situation looks like!
