What Is Mortgage Insurance and How Does It Work?

A shocking 177,431 U.S. properties faced foreclosure listings in just the first half of 2024. That’s a huge number of borrowers who couldn’t pay off their mortgage. But there’s a solution: mortgage insurance.

Over 38 million buyers have already benefited from MI. It allows you to secure a mortgage, even with a low down payment. Plus, if you are unable to make the payments, it compensates the lender for your loan. 

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What Is Mortgage Insurance?

It is an insurance policy that helps the buyer to qualify for a loan. Moreover, if you hit hard times and are unable to make the payments it can also save you from foreclosure. It acts as a shield that protects both you and your lender.

It can help you compensate in such cases: 

• Death or severe illness.
• Default on payment.
• Inability to meet contract obligations
• Foreclosure of the property.

By mitigating the risk, MI makes homeownership more accessible to you.

What Are the Types of Mortgage Insurance

There are 2 types of MI:

1. Private mortgage insurance (PMI).
2. Mortgage insurance premium (MIP).

What is Private Mortgage Insurance (PMI)?

A private mortgage insurance is only available on a conventional loan. It is required when your down payment is less than 20%. Annual private mortgage insurance rates are around 0.5% to 1.5%.

Types of PMI 

• Lender-Paid Mortgage Insurance (LPMI): The lender pays your premium by increasing the interest rates. However, despite the higher interest, your monthly payment will be reduced.
• Borrower-Paid Mortgage Insurance (BPMI): You have to pay a monthly fee that comes with the mortgage payment. Which includes, the interest and mortgage premiums.

What Is Mortgage Insurance Premium (MIP)?

A MIP is only available on a FHA loan. It is required on any down payment. Moreover, it comes with an annual mortgage insurance estimate of 0.15% to 0.85%. 

How to Apply for a Mortgage Insurance?

Here’s how you can apply for a MI in just three steps:

1. Know the Requirements: You need to know the type of insurance needed, the minimum down payment required, and the eligibility criteria set by your lender.
2. Apply for Mortgage Pre-approval: You can apply for by submitting the documents needed for mortgage pre-approval.
3. Choose a Mortgage Insurer: You need to find an insurance provider. Usually, your lender may help your get a mortgage insurer.

How to Calculate Mortgage Insurance?

MI is calculated based on the loan amount and your policy type. Here’s how you can calculate:

• PMI: PMI rate may range from 0.5% to 1.5%. So, if your loan amount is $200,000 on a 0.5% interest. Your annual payments would be $1000 with monthly payments of $83.33.
• MIP: Annual MIP rate may range from 0.15% to 0.85%. So, if your loan amount is $200,000. Your annual rate would be $1,700 with monthly payments of $141.67.

How to Reduce Mortgage Insurance Costs?

MI costs depend on the down payment and the type of insurance. Here are ways to reduce your cost: 

• Increase Your Down Payment: You must increase the down payment to eliminate the need for insurance or reduce the premium.
• Improve Credit Score: A good credit score can help you can cut down or reduce MI cost. This way you can also qualify for better mortgage rates.
• Opt for LPMI: Here, the lender pays the premium with a slight increase in interest rates. This might help you reduce the cost.

What Are the Differences Between PMI and MIP?

Here’s a detailed differentiation of PMI and MIP:

Factors	Private Mortgage Insurance	Mortgage Insurance Premium
Requirements	PMI is required for conventional loans with an 80% higher loan-to-value ratio.	MIP is required for specific government-backed loans like United states department of agriculture loans (USDA) and Federal housing administration loans (FHA).
Premium Rates	Annual premium rates are from 0.3% to 1.5%	Annual premium rates are from 0.45% to 1.0%.
Cancelation Policy	You can cancel PMI once your home equity reaches 20%.	You can cancel MIP after 11 years, if you have put down payment is 10% or more.

Bottom Line

MI is a lifesaver for many homebuyers. You can easily qualify for a mortgage loan with a low down payment and credit scores. If you are a first-time homebuyer looking for an insurance policy, then MIP can definitely help you. With just a 3.5% down payment and a credit score of 580, you can easily avail it.

Moreover, if you are a repeat buyer looking for a high-cost property, opt for PMI. You need a minimum down payment of 3% and a credit score between 580 and 620. So, why wait? Start looking for your dream home now! Your American dream of homeownership is just a few clicks away.

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Frequently Asked Questions

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