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What Exactly is Mortgage Insurance?

Mortgage Education Lesson #4

Mortgage insurance (MI) is often a requirement of home financing and we’ll explain why.

  • How it’s tied to your loan program eligibility
  • Why it’s sometimes required and sometimes not
  • How you can eliminate it and possibly lower monthly payments

What is mortgage insurance?

Not to be confused with homeowners insurance, mortgage insurance is actually an assurance for the mortgage lender that they won’t lose money in the event that the homeowner defaults (can no longer make payments) on their loan. Mortgage insurance (MI) is most commonly applicable if you pay less than 20% down when you close on the house.

Certain types of mortgage loan programs have a statistically higher risk of defaulting, and these are usually the programs that a mortgage lender may require MI on in order to protect itself against that risk. When you can put 20% of the purchase price down, the mortgage lender has more confidence that you’ll be able to make all future mortgage payments. And by paying 20% down, you are making a substantially larger, irredeemable investment that you’re much less likely to default on.

What’s the difference between MI and PMI?

Because some government loans may require $0 down payment or far less than 20% down at closing, mortgage insurance (MI) is usually required in the loan agreement. For example, FHA loans require as little as a 3.5% down payment and therefore, MI is typically required.

If you’re taking out a non-government-backed loan with a private lender but are still putting less than 20% as a down payment, your lender will most likely require private mortgage insurance (PMI).

When is my MI due?

There are a few ways your mortgage insurance premium (MIP) may be scheduled to be paid.

With some government-backed loans, such as an FHA loan, homebuyers are required to pay the MIP at the time of closing and pay towards MI along with their monthly mortgage payments.

If you are required to pay PMI by a non-government lending institution, you will usually have the choice to pay more than the minimum MIP at closing so that your monthly payments are smaller.

How to eliminate mortgage insurance

Once the payments you’ve made to your lender equal a certain percentage of equity of the home (usually 20%), the policy is usually cancelled because you’ve proven that you can be financially responsible for your mortgage payments for an extended period of time.

When the time comes in your payment schedule that you have built at least 20% equity, contact your mortgage servicer to determine whether your mortgage insurance payments will end.

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