Understanding Monthly Mortgage Insurance

When purchasing a home, many buyers are required to pay for mortgage insurance, especially if their down payment is less than 20% of the home’s purchase price. This insurance is designed to protect the lender in case the borrower defaults on the loan. Let’s dive into monthly mortgage insurance, how it works, and its impact on your mortgage payments.

When you take out a mortgage to buy a home, the lender is taking a risk by lending you a large sum of money. If you fail to make your mortgage payments, the lender could lose a significant amount of money. Mortgage insurance is designed to mitigate this risk. It allows lenders to offer loans to borrowers who might not otherwise qualify, often enabling them to secure a mortgage with a lower down payment.

Types of Mortgage Insurance

Private Mortgage Insurance (PMI): This is typically required for conventional loans when the down payment is less than 20%. PMI can be paid monthly, as a single upfront premium, or a combination of both.
FHA Mortgage Insurance: For loans backed by the Federal Housing Administration (FHA), borrowers must pay both an upfront premium and a monthly premium. The cost is generally the same regardless of credit score.
USDA Loan Insurance: Similar to FHA loans, USDA or Rural Development loans require both an upfront and a monthly premium, but the rates are usually lower.

How Does It Work?

Monthly mortgage insurance is added to your regular mortgage payment. This means that each month, you pay a portion of your mortgage principal, interest, property taxes, homeowners insurance, and mortgage insurance. The exact amount depends on the type of loan, the size of your down payment, and your credit score.

Benefits for Borrowers

Lower Down Payment: Mortgage insurance allows you to buy a home with a smaller down payment, which can be particularly helpful if you don’t have a large amount of savings.
Access to Homeownership: By reducing the lender’s risk, mortgage insurance makes it possible for more people to qualify for a mortgage, even if they have a lower credit score or less savings.

Drawbacks

Additional Cost: The main drawback is the added cost of the insurance premiums, which increase your monthly mortgage payment and the overall cost of the loan.

How to Cancel

For conventional loans, you can request to cancel PMI once your loan balance reaches 80% of the home’s original value. Lenders are required to automatically cancel PMI when the balance drops to 78%. FHA loans, however, typically require mortgage insurance for the life of the loan unless you refinance into a conventional loan.

Understanding monthly mortgage insurance is crucial for homebuyers, especially those making a smaller down payment. While it adds to the cost of your mortgage, it also opens the door to homeownership for many who might not otherwise qualify. By knowing how it works and how to manage it, you can make informed decisions about your mortgage and financial future.

Talk to a local First Security Bank mortgage professional today! Start here.

Meet the author

A little about Kristi Thurmon

Kristi was raised in the Natural State and has lived most of her life in Searcy. She enjoys traveling, reading, drinking girly coffee, taking sewing classes at Make.Do. and volunteering for Main Street Searcy. Otherwise, she is managing OnlyInArk.com and marketing at First Security Bank.