Mortgage insurance is an insurance policy purchased by the consumer that protects the lender against loss in the event that the consumer defaults on the mortgage. For most homebuyers, the biggest hurdle to owning a home is the down payment. Private mortgage insurance, or private MI, can allow you to purchase a home with less down than what otherwise may be required. Lenders and investors typically require mortgage insurance for loans with down payments of less than 20%. Mortgage insurance provides lenders a financial guaranty should a loan go into foreclosure. It is this guaranty that allows many lenders not to require a 20% or more down payment when making home loans.
While mortgage insurance provides an obvious benefit to lenders, many times homebuyers will overlook the benefits MI affords them. These can be significant and may include:
Every loan type charges mortgage insurance differently. Primarily, mortgage insurance is paid in two forms; (1) upfront mortgage insurance premium and (2) a monthly insurance fee paid with your mortgage payment. Here is a look at how mortgage insurance is paid in the various loan types:
USDA Loans. The USDA charges consumers an upfront "Funding Fee" of 1.00% of the amount borrowed and a monthly mortgage insurance premium of 0.35% for the life of the loan in the same way that FHA charges their monthly mortgage insurance. Also, like FHA the upfront premium is added to their initial loan balance so the consumer does not have to pay this as a closing cost at the close of escrow.
Conventional Loans. Like VA loans, mortgage insurance on conventional loans does not have an upfront fee but is paid only through monthly installments with your payment. The mortgage insurance rate varies based upon the terms of the loan but generally ranges between 0.50% - 1.15%.