What Is Mortgage Insurance and Why Do I Need It?

| December 18, 2012

house made of moneyWhen you think of “insurance,” you typically think of something that protects you from financial loss. Mortgage insurance, however, protects your lender from loss. Having it still benefits you.

Continue reading to learn more about mortgage insurance, also known as PMI (private mortgage insurance), and why you may need it. If you want mortgage insurance, or if you are seeking a loan to buy a home, DexKnows is your place to find businesses in your community.

What is mortgage insurance?

Mortgage insurance protects your lender if you default on a loan. It guarantees to the lender that the loan will be paid back even if you stop making payments.

Lenders typically require mortgage insurance, often called private mortgage insurance, if you plan to buy a home but make a down payment of less than 20 percent of the sale price or the home’s appraised value.

The federal Consumer Financial Protection Bureau states that mortgage insurance premiums are added to your monthly mortgage payment. You may be able to cancel it after a few years if you pay down your loan balance by a specific amount.

Mortgage insurance often costs you about 0.5 percent to 1 percent of the loan.

Why you need mortgage insurance

While mortgage insurance benefits your lender, you also benefit. Mortgage insurance helps lenders afford to lend you money. It would be harder to get a home loan without it, especially if you can’t afford a down payment of 20 percent or more.

You will still need to make a down payment with mortgage insurance, but it may be more like 10 percent and perhaps as low as 5 percent. You could buy a $100,000 home for $5,000 or $10,000 down, making it more affordable or giving you more money to spend on things like the furnishings.

It’s easy to say you won’t default on payments, but PMI helps guard against the “what ifs.” For instance, what if you become seriously ill and can’t work? Or what if you lose your job?

How you pay mortgage insurance

It’s typically up to borrowers to pay mortgage insurance premiums. There are different ways that you may pay them:

  • Annuals: The borrower pays the first-year premium when the deal closes then a monthly premium with each monthly house payment.
  • Monthly premiums: The borrower pays a monthly payment. This method means higher monthly payments but lowers the closing costs.
  • Single: The borrower covers the entire cost with one payment.

When you can cancel mortgage insurance

Depending on your agreement, you can often cancel the PMI if you pay at least 20 percent of the principal on the loan. Lenders are supposed to share with you how long they estimate it will take you to reach that amount and cancel your mortgage insurance policy.

If you are a high-risk borrower, your lender may require you to wait until you reach as much as 50 percent of the principal.

Mortgage insurance may protect the lender, but you both benefit. As you search for that perfect home, don’t forget DexKnows can help you find lenders, insurance providers and real estate agents in your community.

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Category: Insurance

About the Author ()

Central Ohio journalist with 15 years experience at daily newspapers. Freelance writer and amateur photographer. Storytellers are my heroes, poets my idols and photographers my looking glass.