Reverse Mortgage Insurance

The traditional target for a home down payment is 20% of the purchase price, but that’s out of reach for many buyers.


Mortgage insurance makes it possible to hand over a much smaller down payment and still qualify for a home loan. It protects the lender in case you default on the loan.


With a conventional mortgage — a home loan that isn’t federally guaranteed or insured — a lender will require you to pay for private mortgage insurance, or PMI, if you put less than 20% down.


With an FHA mortgage, backed by the U.S. Federal Housing Administration, you’ll pay for mortgage insurance regardless of the down payment amount.


USDA mortgages, backed by the U.S. Department of Agriculture, and VA mortgages, backed by the U.S. Department of Veterans Affairs, don't require mortgage insurance. But they do have fees to protect lenders in case borrowers default. So you'll still face an extra cost with these home loans in exchange for the low down payment requirement.



How does mortgage insurance work?

You bear the cost of mortgage insurance, but it covers the lender. Mortgage insurance pays the lender a portion of the principal in the event you stop making mortgage payments.

 Meanwhile, you’re still on the hook for the loan if you can’t pay, and you could lose the home in foreclosure if you fall too far behind.

FREE INSURANCE QUOTE- CAR INSURANCE

This is different from mortgage life insurance, which pays off the remaining mortgage if the borrower dies, or mortgage disability insurance, which eliminates the mortgage if the borrower becomes disabled.


PMI vs. MIP and other fees

Mortgage insurance works a little differently depending on the type of home loan. Here’s what you need to know for conventional and government-backed mortgages.


PMI for conventional mortgages

Many lenders offer conventional mortgages with low down payment requirements — some as low as 3%. A lender likely will require you to pay for private mortgage insurance, or PMI, if your down payment is less than 20%.


Before buying a home, you can use a PMI calculator to estimate the cost of PMI, which will vary according to the size of your home loan, credit score and other factors. Typically, the monthly PMI premium is included in your mortgage payment. You can ask to cancel PMI after you have over 20% equity in your home.


» MORE: Calculate your PMI costs


FHA mortgage insurance premium (MIP)

FHA loans feature minimum down payments as low as 3.5% and have easier credit qualifications than with conventional loans. Most FHA home loans require an upfront mortgage insurance premium and an annual premium, regardless of the down payment amount. The upfront premium is 1.75% of the loan amount, and the annual premium ranges from 0.45% to 1.05% of the average outstanding balance of the loan for that year.


You pay the annual mortgage insurance premium, or MIP, in monthly installments for the life of the FHA loan if you put down less than 10%. If you put down over 10%, you pay MIP for 11 years.


» MORE: Is an FHA loan right for you?


USDA guarantee fee

USDA loans are zero-down-payment loans for rural home buyers. Some USDA loans charge two fees: an upfront guarantee fee you pay once and an annual fee you pay every year for the life of the loan. The 2019 upfront guarantee fee is 1% of the loan amount. The annual fee is 0.35% of the average outstanding loan balance for the year, which is divided into monthly installments and included in your mortgage payment. The federal government evaluates the fees each fiscal year and can change them. But your fee amount will not fluctuate; it is fixed when the loan closes.


Typically, borrowers making a down payment of less than 20 percent of the purchase price of the home will need to pay for mortgage insurance. Mortgage insurance also is typically required on FHA and USDA loans. Mortgage insurance lowers the risk to the lender of making a loan to you, so you can qualify for a loan that you might not otherwise be able to get. But, it increases the cost of your loan. If you are required to pay mortgage insurance, it will be included in your total monthly payment that you make to your lender, your costs at closing, or both.


About mortgage insurance

Mortgage insurance protects the lender, not you

Mortgage insurance, no matter what kind, protects the lender – not you – in the event that you fall behind on your payments. If you fall behind, your credit score may suffer and you can lose your home through foreclosure.


There are several different kinds of loans available to borrowers with low down payments. Depending on what kind of loan you get, you’ll pay for mortgage insurance in different ways:


Loan types and mortgage insurance

Conventional loan

If you get a Conventional loan, your lender may arrange for mortgage insurance with a private company. Private mortgage insurance (PMI) rates vary by down payment amount and credit score but are generally cheaper than FHA rates for borrowers with good credit. Most private mortgage insurance is paid monthly, with little or no initial payment required at closing. Under certain circumstances, you can cancel your PMI.


Federal Housing Administration (FHA) loan

If you get a Federal Housing Administration (FHA) loan, your mortgage insurance premiums are paid to the Federal Housing Administration (FHA). FHA mortgage insurance is required for all FHA loans. It costs the same no matter your credit score, with only a slight increase in price for down payments less than five percent. FHA mortgage insurance includes both an upfront cost, paid as part of your closing costs, and a monthly cost, included in your monthly payment.

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