Mortgage insurance is an insurance policy that benefits the lender in the case a borrower defaults, dies, or is otherwise unable to meet the obligations of their loan. If that should happen, the insurance company would pay the lender a portion of the principal balance of the loan. The insurance policy is paid for by the borrower and they are still required to pay back their loan if they should default. The biggest benefit of mortgage insurance for a borrower is it allows the lender to extend credit to those they otherwise would not due to the size of the borrower’s down payment.
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Where do mortgage insurance payments go?
Your monthly payments are sent to an insurer that will pay a portion of your remaining loan balance to your lender in the event you default on your home loan.
If you default, does mortgage insurance pay off your loan balance for you?
No. If you fail to pay back your home loan according to your initial arrangements, most lenders will allow a grace period of around 120 days to help you catch up. After that period, because you failed to pay back your mortgage loan, your lender has the right to sell your home to recoup the debt. This is called foreclosure. Your lender will keep the proceeds from the home sale as well as a payout from PMI. If there is still a remaining balance on your loan, you will be responsible for repaying it.
Many home loans have mortgage insurance, but it works a little differently for each one.
PMI for conventional home loans
Conventional home loans are offered to anyone so long as they, and the real estate they are securing a loan for, meet the minimum requirements of the lender. Down payment can be as low as 3%. Your lender will likely require you to pay private mortgage insurance (PMI) for down payments of less than 20%. PMI can be cancelled once you reach 20% equity in your home and the lender will cancel it automatically once you have 22% equity.
MIP for FHA home loans
Federal Housing Administration (FHA) loans feature down payments as low as 3.5% and easier credit qualifications than conventional home loans. Regardless of your down payment amount, if you have an FHA loan you will have to pay both an upfront and annual mortgage insurance premium (MIP). The upfront premium is 1.75% of your loan amount, and the annual premium is between 0.45% to 1.05% of the average balance of your loan per year.
Annual MIP payments will be made in monthly installments for the life of the loan if you put down less than 10%. If you put down more than 10% you will pay it for 11 years.
USDA mortgage insurance
Loans from the United States Department of Agriculture (USDA) are available with 0% down payment to purchase a home in an area defined as rural. For these loans, you will have to pay two fees: an upfront guarantee fee you pay once and an annual fee you will pay every year for the life of the loan. The upfront guarantee fee for 2021 loans is 1% of the loan amount and you pay it when your loan closes. The annual fee is 0.35% of the average loan balance for the year and is divided into monthly installments and added to your mortgage payment.
No mortgage insurance for VA home loans
The United States Department of Veterans Affairs (VA) home loans are a type of mortgage available to assist active service members, veterans, and surviving spouses in buying, building, and retaining a home. A VA loan allows qualified borrowers to purchase a home with 0% down payment and without mortgage insurance.
Mortgage insurance can be expensive, but don’t let it keep you from getting into a new home. Work with your Mann Mortgage lender to find what your mortgage insurance payments would be or whether you can qualify for a loan that doesn’t require it. Together, you can decide on the right path forward to get you into a new home.