What Is Mortgage Insurance?

Mortgage insurance helps protect lenders from losses if borrowers stop making mortgage payments. You may be required to purchase mortgage insurance or similar types of coverage if you get certain government-backed mortgages or a conventional mortgage with less than a 20% down payment. Additionally, you’ll likely want (and may be required to buy) homeowners insurance, which protects you if something happens to your home.

Types of Mortgage Insurance

There are several types of mortgage insurance and similar insurance-like programs that vary depending on the type of mortgage. Here’s an overview of how each works:

Private Mortgage Insurance (PMI)

Generally, you have to pay for mortgage insurance if you get a conventional mortgage (non-government-backed mortgage) and put less than 20% down. For example, with a $400,000 mortgage, you may have to pay for mortgage insurance if your down payment is less than $80,000.

Federal Housing Authority (FHA) Mortgage Insurance

Federal Housing Authority (FHA) mortgages are backed by the FHA and offered by certain lenders. There are several types of FHA loans, and these could be a good option if you have only a small down payment or don’t have good enough credit to qualify for conventional loans. FHA loans have a mortgage insurance premium (MIP) that you’ll pay for with an upfront fee and monthly payments.

U.S. Department of Agriculture (USDA) Guarantee Fees

U.S. Department of Agriculture (USDA) home loans don’t require down payments and can help buyers who have low income or credit purchase a home in certain suburban and rural areas. USDA loans don’t technically have mortgage insurance, but you have to pay upfront and annual guarantee fees that essentially serve the same purpose. You can roll the upfront portion into your mortgage if you’d prefer.

Department of Veterans Affairs (VA) Loan Funding Fees

U.S. Department of Veterans Affairs (VA) home loans don’t require a down payment and don’t have mortgage insurance. However, you may have to pay a one-time funding fee, which you can choose to roll into your mortgage. Some people may qualify for a fee waiver or refund—the VA’s website lists the requirements.

How Much Does Mortgage Insurance Cost?

Your mortgage insurance costs will depend on the type of mortgage you get and your loan amount. With each type of mortgage, the rates can also vary based on eligibility and other factors.

• Conventional loan PMI: PMI costs anywhere from 0.2% to 2% of the total loan amount per year when borrowers make monthly payments. Your rate is based on several factors, such as your credit score, down payment, and length of the loan.
• FHA loan MIP: The upfront portion of your mortgage insurance premium is usually 1.75% of the loan amount—your credit score doesn’t impact your premiums—and you can add the fee to your mortgage rather than paying it in cash if you’d prefer. The monthly payments are based on the annual premium, which is 0.50% to 0.55% of the loan amount for most new borrowers.
• USDA guarantee fees: The USDA upfront guarantee fee is 1% of the loan amount, which you can add to your mortgage balance. The annual fee, which you’ll pay for monthly, is 0.35% of the loan amount.
• VA funding fees: The VA funding fee ranges from 0.5% to 3.3% depending on the type of VA loan, whether you’re buying a home or refinancing your mortgage, and whether this is the first time you get a VA loan.

How to Avoid Mortgage Insurance

There are several ways to buy a home without paying for mortgage insurance. However, they might not be realistic for you right now, and they aren’t necessarily better than putting less money down or getting a government-backed mortgage and paying for mortgage insurance.

• Put 20% down: If you can afford to make at least a 20% down payment, the most straightforward option is to get a conventional loan.
• Get lender-paid mortgage insurance: Some mortgage lenders offer conventional loans that don’t require a 20% down payment or mortgage insurance. However, you’ll often receive a higher interest rate because the lender is paying for the insurance.
• Get a piggyback loan: You might be able to get a piggyback loan or 80-10-10 mortgage, essentially taking out a second mortgage and using the funds to make a 20% down payment on the first mortgage. Although you’ll avoid mortgage insurance, you’ll have to qualify and pay closing costs for both loans, accrue more interest payments, and potentially face more complicated refinancing down the road.

Check and Monitor Your Credit

Although your credit score will only impact your mortgage insurance rates with a conventional loan, your credit history and scores can affect your eligibility for different types of mortgages and the interest rate you receive. If you’re getting ready to buy a home, check your credit report and a credit score to see where you’re at.

Contact O1ne Mortgage for Expert Mortgage Services

At O1ne Mortgage, we understand that navigating the complexities of mortgage insurance can be daunting. Our team of experienced mortgage brokers and loan officers is here to help you find the best mortgage options tailored to your needs. Whether you’re a first-time homebuyer or looking to refinance, we can guide you through the process and help you make informed decisions.

Don’t hesitate to reach out to us at 213-732-3074 for any mortgage service needs. Let O1ne Mortgage be your trusted partner in achieving your homeownership dreams.