Tag - USDA loans

Mortgage Insurance : A Breakdown

What is Mortgage Insurance?

Mortgage insurance is a specialized protection for the lender -not the buyer- if you are unable to make your mortgage payments, for any reason. If you fall behind, your credit score may suffer, and you could stand to foreclose on your home.

How does it work?

Mortgage insurance lowers the risk to the lender making the loan to you, that way you are eligible for a loan you might not otherwise get. This does increase the cost of the overall loan but if you are required to get it, it will either be included in your monthly payment, your costs at closing, or both.

Who needs Mortgage Insurance?

Typically, borrowers making a down payment of less than 20 % of the purchase price of the home also will need to pay for mortgage insurance. This insurance is also usually required on FHA and USDA loans.

Are there different ways to pay for Mortgage Insurance?

There are several different kinds of loans available to borrowers who have low down payments, and the resulting mortgage insurance can be paid for in a number of ways:

  • Conventional Loans – your lender may arrange for a private company to insure you. Private mortgage insurance (PMI) rates vary by the amount of the down payment amount and credit score, but are tend to be cheaper than FHA rates for good credit. Under certain circumstances, you may be able to cancel your PMI. (see last question)
  • FHA Loans – premiums from your insurance are paid to the Federal Housing Administration (FHA). This insurance is required on all FHA loans. FHA insurance is paid by both monthly payments and upfront costs included in closing. Loan amounts can increase if there is not enough cash on hand to pay upfront and the fee is rolled over to the mortgage.
  •  USDA Loans –  Similar to the FHA but typically cheaper. You will pay for insurance both upfront and monthly. You may choose to roll the upfront portion to the mortgage but again, this will increase overall loan cost.
  • VA Backed Loans – replaces mortgage insurance and functions similarly to it. There is no monthly premium with this loan but there is an upfront “funding fee”, which varies depending on the type of military service, the down payment amount, disability status, type of loan (buying or refinancing), and whether or not it is a first VA loan. You have the choice to roll the upfront fee with this as well.

Can you get rid of mortgage insurance?

In order to remove private mortgage insurance (PMI), you must have at least 20% equity in your home. You may ask the lender to cancel PMI when you have paid down the mortgage balance to 80% of the home’s original appraised value. When the balance drops below 78%, the mortgage servicer is required to eliminate the PMI.

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