What is Mortgage Insurance?
Mortgage Insurance protects the lender in case you stop making your mortgage payments. While it is not required for every loan, certain factors determine whether you must pay for it.
Key Types of Mortgage Insurance:
Private Mortgage Insurance (PMI): This applies to conventional loans.
Mortgage Insurance Premium (MIP): This is specific to FHA loans.
What is Homeowner’s Insurance?
Homeowner’s Insurance protects you and your home from physical damages and legal liability. Lenders typically require proof of coverage before you can close on your home.
What does Homeowner’s Insurance Cover?
Dwelling: The physical structure of the home.
Personal Property: Furniture, clothes, and electronics.
Liability: Protection if someone is injured on your property.
Additional Living Expenses (ALE): Hotel costs if your home is unlivable due to a covered event, such as a fire.
Mortgage Insurance Requirements by Loan Type
Each loan program has unique rules for mortgage insurance. Here is a breakdown of the most common options:
Conventional Loans: You do not need a 20% down payment to secure a conventional loan, but PMI is required for any down payment less than 20%.
FHA: Mortgage Insurance is referred to as MIP in this case. Most FHA Loans require insurance for the life of the loan. However, if you put down 10% down or more with at least a 15-year term, then the MIP is removed after 11 years.
VA: One of the many benefits of the VA Loan is that there is no monthly mortgage insurance requirement.
USDA: While USDA Loans do not have “PMI” they do require an upfront guarantee fee that is 1%/ of the loan amount paid at closing. They also include an annual fee that’s 0.35% of the loan amount, which is paid as a monthly premium.
How much is Mortgage Insurance?
Typically, fees range from 0.5% to 2% of the original loan amount, per year. This cost is divided into twelve installments and added to your monthly mortgage payment.
How do you get rid of PMI?
If you have a conventional mortgage, lenders are legally required to cancel PMI once the mortgage balance drops to 78% of the home’s original purchase price or when the loan reaches the halfway point of its term.
You can also request cancellation once you’ve reached 20% equity in your home. To do this, you must be current on your payments and may need a new appraisal to verify the current property value.
Removing MIP from FHA Loans
Removing insurance from an FHA Loan depends on when your loan started:
If your mortgage originated before June 3, 2013:
- You have made all your monthly payments on time.
- You’ve paid at least 5 years of a 20,25,or 30-year loan.
- Your mortgage must have a loan-to-value (LTV) ratio of 78% or less.
If your loan originated on or after June 3, 2013:
- Your down payment must have been 10% or more at the time of purchase.
- You must have made on-time payments for the past 11 years.
If you do not meet these specific requirements, you may be able to refinance your FHA loan into a conventional mortgage to eliminate the insurance costs.
How much does homeowner’s insurance cost?
The cost varies based on the state you live and the value of your home. When choosing your plan be sure to shop around with different companies to ensure you are getting the best deal and the right amount of coverage for your home.
How is homeowner’s insurance paid?
You can pay your insurance company directly, but many homeowners choose to use an escrow account. By using an escrow account, the cost is factored into your monthly mortgage payment. When the insurance bill is due, the lender pays it on your behalf using the funds in the account.
The Takeaway
Both mortgage insurance and homeowner’s insurance are important to the lending process. Mortgage insurance makes homeownership more accessible for borrowers with lower down payments by giving lenders financial security. While homeowner’s insurance helps protect your biggest asset: your home.
Are you ready to start the mortgage process? Contact us today!
