If you’ve approached a lender for a mortgage, you may have been told you need mortgage insurance if you aren’t making a 20% down payment. What is mortgage insurance and is it mandatory? Here’s what you need to know.
What Is Mortgage Insurance?
Mortgage insurance is a type of insurance cover that financially protects the lender if the home loan borrower defaults on their mortgage payments. Mortgage insurance reduces the risk taken by the lender and helps you qualify for a mortgage that you otherwise might not have been able to. Keep in mind that while your home loan provider will arrange for the mortgage insurance cover, you’ll need to pay for it.
How Much Does Mortgage Insurance Cost?
Mortgage insurance can cost you a few thousand dollars per year. This amount is usually split into monthly payments. That said, the actual amount that you’ll need to pay towards your mortgage insurance policy can vary based on the down payment you make, the size of your loan, and your credit score.
Things You Should Know About Mortgage Insurance
Mortgage Insurance Requirements Vary For Different Loans: Remember that mortgage insurance requirements will vary based on the type of loan you opt for. If you take up an FHA loan, you’ll need to pay the insurance amount upfront and also every month if your equity is less than 20%.
Conventional loans will require you to take mortgage insurance if you don’t have an equity of at least 20%. VA loans and USDA loans don’t require borrowers to have mortgage insurance.
You Can Opt For Lender-paid Mortgage Insurance: Some mortgage providers will charge you a slightly higher rate of interest, and in return pay your mortgage insurance premium. In the case of lender-paid mortgage insurance, the lender usually pays a one-time premium to the mortgage insurance company.
Keep in mind that if you opt for lender-paid mortgage insurance, you will be paying a higher rate of interest for the duration of the loan term. The interest rate does not drop even if you discontinue the mortgage insurance policy.
You Can Drop Your Mortgage Insurance: If you don’t make a down payment of 20%, you may be required to get mortgage insurance. However, as you keep making your mortgage payments, your equity in the house will rise to 20%, after which you can discontinue your mortgage insurance policy. Keep in mind, you will need to reach out to the lender to inform them that you would like to drop your mortgage insurance plan.
Mortgage Insurance Protects The Lender, Not You: A mortgage insurance policy is solely meant to protect the lender. If you miss your mortgage payments, the mortgage insurance company will provide a payout to the lender to compensate them for their loss.
Mortgage insurance can certainly add to the cost of owning a house. That said, it also helps you purchase a house even if you aren’t able to make a 20% down payment. Make sure to ask your lender any questions you may have about your mortgage insurance plan before signing up for it.