What is Mortgage Insurance?
by Ted Ricasa on Apr 27, 2014
Buying a home can be an exciting adventure. For most people, buying a home will also be one the largest investments they will make. People have a lot of questions during the process of purchasing a home and can be confused about all of the different fees bundled up into their payments. A lot of people have questions about one fee specifically: mortgage insurance. What is mortgage insurance? Do you have to pay for mortgage insurance when buying a new home? Fast Home Help explains.
How Does Mortgage Insurance Work?
So, what is mortgage insurance? Basically, mortgage insurance is a policy designed to protect the lender in the event of a default. Should you become unable to continue making payments, your mortgage insurance guarantees that the lender will receive the remaining balance from the insurance company. Many lenders require mortgage insurance for people who don’t make at least a 20% down payment on a home. A monthly fee for the policy will be rolled into your mortgage payment.
Do I Pick the Insurance Provider?
No. The lender chooses the insurance company for you. Some will allow you to pay the total insurance premium up front at closing if you choose. However, most people elect to simply have the fee added to their monthly mortgage payment, so they only need to send one payment to the mortgage company instead of two. If you have any questions about the process, feel free to talk to your lender, insurance agent, or contact Fast Home Help for more information.
Is PMI the Same as FHA or VA Insurance?
No. The most common type of mortgage insurance is referred to as PMI, or private mortgage insurance. PMI is set up by a private lender using a private insurance company. FHA (Federal Housing Administration) and VA (US Department of Veterans Affairs) mortgage insurance is set up through the federal government for qualifying buyers. The rates you will be subject to will depend on the type of mortgage being secured.
What Can I Do to Avoid Paying Mortgage Insurance?
There are two routes to avoiding mortgage insurance. The first is simply to pay a 20% down payment on your new home. Unfortunately, for many people this just isn’t feasible. The other route is to cancel the policy, but you must have built up a specific amount of equity in your home. Once you’ve paid down at least 20% of the principal amount due, you can request that the mortgage insurance policy be canceled, which will bring down your monthly payment. The lender may automatically cancel the mortgage insurance policy, but this doesn’t usually happen until you’ve paid 22%. You can talk with your lender about your mortgage insurance policy and discuss your options for avoiding PMI altogether or canceling the policy once you’ve reached a certain amount of equity.