Mortgage Insurance
Mortgage insurance is a financial product designed to protect lenders in the event that a borrower defaults on their mortgage payments. It is typically required when a borrower makes a down payment of less than 20% of the home’s purchase price. There are two main types of mortgage insurance:
1. Private Mortgage Insurance (PMI): PMI is provided by private insurance companies and is required for conventional loans with a down payment of less than 20%. Borrowers pay a monthly premium for PMI until they have accumulated sufficient equity in the home, typically reaching a loan-to-value ratio of 80% or less.
2. Federal Housing Administration (FHA) Mortgage Insurance: FHA loans, which are insured by the Federal Housing Administration, require borrowers to pay an upfront mortgage insurance premium (UFMIP) at closing, as well as an annual mortgage insurance premium (MIP) that is paid monthly. FHA mortgage insurance protects lenders against losses on loans made to borrowers with lower credit scores or smaller down payments.
Mortgage insurance allows borrowers to obtain financing with a smaller down payment, but it increases the overall cost of homeownership. It’s important for borrowers to understand the terms and costs associated with mortgage insurance when considering their home financing options.