What is Mortgage Insurance and Why Do You Need It?

There’s a commercial out there with singer Lionel Ritchie where he opens by saying, “Confusion normally comes with the word healthcare.”

Not so fast Lionel, we’d say it comes with the word mortgage insurance. People know why they need healthcare, but most homebuyers struggle to understand why they have to get mortgage insurance and how it works.

Let us help solve the mortgage insurance puzzle for you right now.                                          

What is Private Mortgage Insurance (PMI)?

PMI protects the mortgage lender in case a borrower defaults on their loan and the house isn’t worth enough to repay the debt in full through a foreclosure sale. If that happens, the insurance company will reimburse the lender.

What PMI Does Not Cover

While there is mortgage insurance that protects the buyer, PMI does NOT cover your mortgage payments in case of:       

• Job loss
• Becoming disabled
• Death

These issues can be covered by Mortgage protection insurance (MPI), a life insurance policy with a decreasing benefit that only pays out to your lender to cover your mortgage debt. Or mortgage unemployment insurance (MUI) which pays your mortgage if you are laid off or fired without cause. The purpose is to keep your home out of foreclosure while you are looking for work.

Keep in mind, these insurance products and have absolutely no correlation to PMI.

When is PMI Required?

If you are getting 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 have less than a 20% down payment.

An FHA mortgage, backed by the U.S. Federal Housing Administration, requires you to 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, do not require mortgage insurance

The benefit of PMI is that it makes it possible to have a much smaller down payment than say 20% and still qualify for a home loan. 

How Much Does PMI Cost?

PMI varies from lender to lender but is usually around one-half of 1% of the loan amount. The chart below includes figures from The Urban Institute’s Housing Finance Policy Center. Using the rates below, PMI on a $300,000 mortgage would cost $1,740 to $5,580 per year, or $145 to $465 per month.

Do I Have to Pay PMI Forever?

The good news is no. You can remove PMI from your monthly payment after your home reaches 20% in equity, either by requesting its cancellation or refinancing the loan. The steps you’ll need to take to cancel your PMI will vary depending on the type of insurance you have.

If you’re looking to purchase a home or if you’ve hit that magic 20% equity and would like to refinance, contact us today and we’ll work with you to get you into a loan that fits your unique needs.