If you are trying to obtain a mortgage with a small down payment (less than 20% of the total value of the loan), you may be required to pay for mortgage insurance.
Mortgage insurance is a type of insurance that is designed to protect home loan lenders should the borrower of the funds be unable to make the required payments on their mortgage. This could be because the borrower is no longer in the same financial situation and does not have the financial resources to pay or because the borrower has passed away. In either of these events, a mortgage insurance policy will ensure that the lender receives at least a portion of the difference between the funds they lent to the borrower and the amount the borrower has already paid back.
Mortgage insurance is typically required for borrowers that are borrowing 80% or more of the total loan value because mortgages with such high loan-to-value ratios are more likely to go into default.
Types of Mortgage Insurance
Depending on what type of mortgage you are obtaining – Conventional, FHA, VA, USDA, etc. – there are different types of mortgage insurance that may be required by your lender.
In some cases, private mortgage insurance, also known as PMI, may be required. PMI is a mortgage insurance policy through a private company. Initial fees and monthly premiums are typically lower with PMI but can vary based on down payment amount and the borrower’s credit.
In cases where the borrower is obtaining an FHA loan to purchase their home, the borrower will be required to pay for mortgage insurance through the FHA. FHA mortgage insurance does not vary much from borrower to borrower, as credit does not affect the cost of the policy.
Paying for Mortgage Insurance
Mortgage insurance can be paid as a monthly premium that can be added to your regular mortgage principal payments or it can be paid upfront as a lump sum.
The good news is that once you have paid off a certain portion of the principal balance of your mortgage, you will most likely be able to cancel your mortgage insurance policy.
If you would like to know more about mortgage insurance and whether you may be required to obtain a mortgage insurance policy for your loan, give the Kingwood Mortgage Guys a call today! We are always happy to help!