If you’re planning to buy a home and aren’t putting down 20%, you’ve probably heard of mortgage insurance. But what exactly is it, and do you really need it?
Let’s break it down in simple terms so you can make informed decisions when navigating the homebuying process.
What Is Mortgage Insurance?
Mortgage insurance is a policy that protects the lender, not the buyer, in case the borrower defaults on the loan. It’s commonly required when a buyer puts down less than 20% on a conventional loan.
There are different types depending on the loan:
- PMI (Private Mortgage Insurance): For conventional loans.
- MIP (Mortgage Insurance Premium): For FHA loans.
- VA Funding Fee: While not technically insurance, VA loans often include this one-time fee instead of monthly insurance.
Why Do Lenders Require It?
Lenders take on more risk when you borrow a large percentage of a home’s value. Mortgage insurance gives them a financial safety net, allowing them to approve loans they might otherwise reject.
How Much Does It Cost?
Mortgage insurance costs vary based on:
- Your loan amount
- Your credit score
- Your down payment size
For conventional loans, PMI typically ranges from 0.3% to 1.5% of the original loan amount per year.
Can It Be Removed?
Yes, for conventional loans! Once your loan-to-value ratio (LTV) reaches 80% (meaning you’ve paid off 20% of your home’s value), you can usually request to cancel PMI. It’s automatically removed when your LTV hits 78%.
FHA loans are different—MIP usually lasts for the life of the loan unless you refinance into a conventional mortgage.
Do You Need It?
- Yes, if you’re putting down less than 20% on a conventional loan.
- Yes, if you’re using an FHA loan.
- No, if you qualify for a VA loan (though a funding fee still applies).
- No, if you’re able to make a 20%+ down payment.
Mortgage insurance can feel like an extra expense, but it also opens the door to homeownership for many buyers who don’t have a large down payment saved up. If you’re strategic, it can be a temporary cost—one that gets you into your dream home sooner.
Want help figuring out your loan options and what kind of mortgage insurance might apply to you? I’m here to help guide you every step of the way!
