Mortgage 101
May 25, 2021

Mortgage Insurance: Why You Need it and How it Protects Your Finances

When researching home financing options, you’re bound to come across the concept of mortgage insurance, and you may be wondering, “What is mortgage insurance, and do I really need it?” To help you make the best financial decisions that satisfy your needs, here’s our guide to mortgage insurance.

What is Mortgage Insurance?

When a borrower isn’t able to make a 20% down payment, mortgage insurance allows them to be able to get that mortgage loan regardless. Mortgage insurance protects lenders against losses due to the default of a mortgage loan. By providing protection to lenders, it lowers the risk they take on, and it allows you to qualify for a loan you may not have been able to qualify for without it.

How Does Mortgage Insurance Work for Different Loan Programs?

Mortgage insurance works differently depending on the type of loan you’re after. Here’s a breakdown of what to expect with each loan type.

Conventional Loans

Conventional loans with a down payment of less than 20% carry Private Mortgage Insurance (PMI). PMI rates vary and depend on your loan-to-value ratio and credit score. Your loan-to-value ratio is the how much you borrowed versus the home’s value. This insurance can be paid monthly or upfront.

Once you’ve achieved 20% equity, your mortgage insurance can be cancelled.

FHA Loans

FHA loans require premiums that are paid to the Federal Housing Administration. This insurance is made up of an upfront mortgage insurance premium (UFMIP) and a monthly insurance premium (MIP) included in the mortgage payment. The UFMIP is based on your loan amount, and the MIP depends on the loan term and the loan-to-value ratio.

USDA Loans

USDA loans include an Annual Guarantee Fee that is unavoidable regardless of the down payment amount. An upfront premium is financed into the loan, so you pay for it in your monthly payments.

VA Loans

There are no monthly mortgage insurance premiums for VA loans, but there is a one-time upfront funding fee.

How Can You Avoid Paying Mortgage Insurance?

The best way to get out of paying for mortgage insurance is to make a down payment of 20%. If you’re wondering how much you really need for a down payment, know there are pros and cons to making larger or smaller down payments, and your Loan Originator can help you understand what works best for your unique situation.

All Your Mortgage Insurance Questions Answered

When it comes to mortgage insurance or any other home financing questions you have, our experienced Loan Originators will be happy to walk you through everything you need to know. And when it’s time to purchase or refinance, our efficient process and excellent customer service will help you enjoy a stress-free mortgage process. Contact us today to get started.

Ready to get started?

Homestead Funding offers exceptional customer service and a convenient mortgage process. Whatever your financing needs, our goal is to exceed your expectations.