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Do I Have Mortgage Insurance?

When getting a home loan, one of the crucial questions most people have is – do I have mortgage insurance? This is an important question because this can determine how much you will be put aside each month for mortgage payments.

Do I have mortgage insurance? The answer to this question is probably yes. Most lenders will demand paying for some mortgage insurance premiums. In most cases, if you have a lower credit score and don’t qualify for a loan, the lender will ask for mortgage insurance as protection.

Person holding documents

To know whether you have this insurance, you need to look at your mortgage agreement. You need to know, however, that this insurance only protects the lender. Keep reading and find out more about mortgage insurance.

What Is Mortgage Insurance?

When you sign a mortgage lien, you may be obligated to pay for something called mortgage insurance. This insurance is not the same as home insurance you pay through escrow. Escrow pays property tax, and it pays home insurance, but it doesn’t pay for mortgage insurance. Mortgage insurance is a policy that protects the lender in case borrowers stop paying for the loan. This reduces the risk for lenders and allows them to give a loan to borrowers who otherwise would not be qualified to receive the loan.

Person holding mortgage agreement

Mortgage Insurance and Loan Types

Depending on the type of mortgage loan you are applying for, you may get different types of mortgage insurance. In most cases, if you apply for a mortgage with less than 20% of the down payment, you will probably face the condition to take mortgage insurance in order to get approved for a loan. However, some government-backed loans have a condition to take mortgage insurance regardless of the down payment you put for the home. Here is mortgage insurance depending on the type of loan you take.

Type of loanMortgage insurance
Conventional loansYou will have to take Private Mortgage Insurance (PMI) if you put less than 20% of the down payment
Federal Housing Authority (FHA) loanYou will have to have PMI
U.S. Department of Agriculture or USDA loansYou will have to pay a guarantee fee
VA loansDon’t need mortgage insurance, but you will have to pay for funding fees

How Much Does Mortgage Insurance Cost?

If you go through the best mortgage books, you will find that mortgage insurance will be calculated for each borrower differently. This insurance is calculated as a percentage of your home loan. The lower your credit score is, and the smaller your down payment, the bigger your mortgage insurance will be. However, as your principal balance goes down, the mortgage insurance will also go down. Also, different lenders will have different mortgage insurance providers, and the rate you will pay will be different. But with some of the country’s biggest mortgage providers, MI will look like this:

  • USDA Loans – 0.35% of loan amount and 1% of down payment
  • FHA Loans – 0.45% to 1.05% of loan amount and a minimum down payment of 1%
  • Conventional loans – range from 0.17% to 1.86% of the loan amount
  • Adjustable mortgage loans – Can go high as 2.33% of the loan amount

Types of Private Mortgage Insurance 

As you know, the mortgage doesn’t expire, which is why it is crucial to understand all the terms of your loan agreement before signing it, including what kind of PMI you will have. This is something your mortgage broker will have to explain to you before you sign anything, but if you don’t have a broker at your side, these are the types of MI you will be presented with:

  • Borrower paid monthly – The most common type of MI where the borrower pays monthly rate usually as part of their monthly mortgage payment,
  • Single premium – Borrower pays one single PMI payment upfront,
  • Split premium – Borrowers pay one part upfront, and the other part is divided into monthly payments,
  • Lender paid – Borrower pays a higher interest rate or mortgage originator fee instead of MI,
  • Declining renewal PMI – These are policies where your monthly payments decrease each year as your equity is getting higher.

How to Avoid Paying for Mortgage Insurance?

If you take PMI, you will pay for this until your equity doesn’t reach 20% of your loan. With federally backed loans, you will have to pay until the loan is paid off unless you put 10% of the down payment. In this case, you will pay for MIP for 11 years.

The best way to avoid paying for PMI is to put a down payment of 20%. However, in some cases, people don’t have enough money to provide 20% of the down payments. If that’s the case with you, you can put down 10% and finance the remaining 10% with a loan and take the mortgage for the rest 80%. This scenario is not that often, but you can ask your mortgage broker to help you find lenders that allow these loans.

Also, you can shop around for lenders-paid PMI mortgages, but with this option, you will probably end up paying higher interest rates.

People looking at the documents

Should I Pay for Mortgage Insurance?

As you can see, there are few options when you can avoid paying for PMI or MIP, but in most cases, if you don’t have a good credit score and enough down payment to put down, you will have to pay for this insurance. And sometimes, paying for this insurance comes as less costly than taking a loan with higher interest rates and no PMI. The best is to talk with your broker or financial advisor and see what your options are. Maybe financing the down payment with another loan will be less expensive than paying for PMI for the next couple of years.