Do I Have Mortgage Insurance? Understanding and Checking Your Policy

When taking out a mortgage, one common question homebuyers have is “Do I have mortgage insurance?” 

Mortgage insurance is typically required when the loan-to-value ratio (LTV) exceeds 80%, meaning less than 20% of the home’s purchase price was put down. It’s also mandatory for government-backed loans like FHA and VA loans, regardless of down payment amount. However, some lenders may waive it for conventional loans with a 10-15% down payment.

Mortgage insurance is an additional policy that protects the lender if the borrower defaults on their loan. It is required for certain types of loans and situations. Knowing whether or not you have this insurance is important for understanding your full monthly payments and overall costs.

This article will explain what mortgage insurance is, when it’s required, and how to check if you have a policy.

What Is Mortgage Insurance?

Mortgage insurance, also known as PMI (private mortgage insurance) or MIP (mortgage insurance premiums), is an insurance policy that protects the lender in the event that the borrower defaults on the mortgage. This provides an extra layer of protection for the lender, allowing them to lend to borrowers that may not meet the standard loan qualifications.

Essentially, if the borrower stops making payments, the mortgage insurance policy would pay out to cover the lender’s losses. This ensures the lender can recoup the outstanding loan balance if the borrower goes into foreclosure. The borrower is responsible for paying the monthly premiums on the mortgage insurance.

Why Would You Need Mortgage Insurance?

Mortgage insurance is typically required anytime the loan-to-value ratio (LTV) is higher than 80%. This means if you put less than 20% down on the home purchase, mortgage insurance will likely be necessary. 

For example, if you purchase a $200,000 home but only put down $10,000 (5% down), the LTV would be 90% and you would need mortgage insurance. This protects the lender in case you default when owing a high balance relative to the home’s value.

Mortgage insurance may also be required for certain loan types like FHA loans or VA loans regardless of down payment amount. The requirements vary based on the lending guidelines.

Do You Have to Have Mortgage Insurance?

For most conventional loans, mortgage insurance is required whenever you put down less than 20% of the home’s purchase price. However, there are some exceptions:

• Some lenders may not require PMI if you put down as little as 10% or 15% 
• Jumbo loans above a certain amount may not require mortgage insurance
• Affordable second mortgage programs may cover the additional down payment, eliminating the need for PMI

Government-backed loans like FHA and VA loans require mortgage insurance no matter how much you put down. It is built into these programs to protect the government lender. 

How Can You Check If You Have Mortgage Insurance?

If you are unsure whether or not your loan requires mortgage insurance, there are a few easy ways to check:

1. Review Your Loan Documents

Dig up your mortgage documents and look for any references to PMI, MIP, mortgage insurance, or sections detailing monthly escrow payments. The requirement for mortgage insurance will be spelled out here.

2. Contact Your Lender or Servicer

You can simply call and ask your lender or loan servicer whether or not your particular loan has mortgage insurance attached to it. They have all the details of your loan and can tell you definitively if you have been paying for a policy.

3. Check Your Monthly Statement or Online Account

Looking at your monthly mortgage statement, whether via paper or online, can reveal if you are paying for mortgage insurance. There will typically be a line item for PMI or MIP premiums taken out with your monthly payments. 

What Are the Different Types of Mortgage Insurance?

There are a few varieties of mortgage insurance required by different loan programs:

1. Private Mortgage Insurance (PMI)

This is the most common type of mortgage insurance for conventional loans from private lenders. PMI premiums are paid monthly along with principal, interest, taxes, and insurance.

2. Federal Housing Administration (FHA) Mortgage Insurance

For FHA home loans, the mortgage insurance is called MIP and serves the same purpose as PMI. It protects the government lender from losses. 

3. Veterans Affairs (VA) Loan Guaranty Service

Instead of PMI, VA loans require a one-time funding fee that serves as insurance. This fee can either be paid upfront or rolled into the loan amount. 

4. USDA Loan Guarantee Fee

For USDA rural housing loans, borrowers pay an upfront guarantee fee as insurance for the lender, which is a percentage of the loan amount.

How Does Mortgage Insurance Work?

Mortgage insurance protects the lender by covering losses if a borrower defaults. This coverage is facilitated between the lender and private mortgage insurers or government agencies.

The borrower pays monthly premiums or upfront fees and the insurer promises to cover losses related to foreclosure. Policies have coverage limits that cap payouts. Mortgage insurance stays in place until the borrower builds up 20% equity in the home.

What Are the Costs Associated with Mortgage Insurance?

Typical mortgage insurance costs range from 0.5% to 1% of the total loan amount per year. On a $200,000 loan with 5% down, PMI may cost around $1,000 to $2,000 annually. Monthly premiums would be $83 to $167 added to the regular mortgage payment.

Government-backed loans may have upfront mortgage insurance fees of 1-2% of the total loan amount.

Over the life of the loan, mortgage insurance can cost tens of thousands. Exact pricing depends on loan details, credit score, and insurer. Policies can be expensive but provide necessary protection for riskier loans.

How Can You Remove or Cancel Your Mortgage Insurance?

Most borrowers want mortgage insurance removed as soon as possible to lower payments. Here are some ways it may be canceled:

• Reaching 20% home equity through appreciation or paydown
• Refinancing into a new loan with at least 20% equity
• Getting lender approval for removal by providing updated financial info and home value
• Discontinuing payments illegally (not recommended)

Be sure to check specific guidelines to have PMI removed from your individual loan.

What Happens If You Don’t Have Mortgage Insurance When Needed?

If your loan requires mortgage insurance but you never obtained a policy, the lender will take action. They may purchase a policy on your behalf and start charging you for coverage. Not having necessary insurance violates loan terms.

In worst cases, the lender may call the full loan amount due immediately. However, they usually just setup the required insurance if it has lapsed unintentionally. Having proper coverage protects all parties.

What Are Some Alternatives to Having a Traditional Mortgage Insurance?

Some options to avoid standard PMI are:

• Piggyback loan – Combining a first and second mortgage, avoiding the need for PMI
• Paying a higher interest rate in exchange for no PMI 
• Paying a single upfront mortgage insurance premium instead of monthly payments
• Applying for lender-paid mortgage insurance programs 

These options have pros and cons compared to regular mortgage insurance. A loan officer can explain how they work to see if they make sense in your situation. 

Conclusion

Knowing whether or not your mortgage loan requires insurance coverage is an important factor in understanding your total costs. Mortgage insurance through PMI or other options may be mandatory if you put down less than 20% or have a government-backed loan. Checking your loan documents or contacting your servicer can reveal if you have been paying premiums. While mortgage insurance comes with added fees, it provides protection for both lender and borrower in certain loan situations.

Frequently Asked Questions(FAQ)