Understanding the Basics of Mortgage Insurance

With all the talk these days about mortgage insurance, now may be a good time to understand what it is and how it works.

First, homeowners insurance, also known as hazard insurance, is different than mortgage insurance. Hazard insurance is taken out by a homeowner to insure the property itself. Mortgage insurance is a policy that lenders take out to insure themselves against you defaulting on your mortgage. Some conventional and most Federal Housing Administration FHA) loans carry mortgage insurance.

Conventional Loans

All conventional loans where the loan-to-value ratio is greater than 80% will require some type of mortgage insurance. This insurance is paid monthly with the mortgage payment, and the rate will vary based on the loan-to-value ratio.

Existing homeowners who had more than 20% equity but now have less than that due to declining property values and are looking to refinance may still be in luck.

Many of the refinance programs that are available, specifically on mortgages that were insured by either Fannie Mae or Freddie Mac, have provisions where mortgage insurance can remain off the loan.

Check with your mortgage professional for more details.

FHA Loans

FHA loans have two types of mortgage insurance associated. The first is called the upfront mortgage insurance premium. This fee can be financed and is 1% of the base loan amount. If you borrow $100,000, your loan will carry a premium of $1,000, making the amount you borrow $101,000. Then you will still have a monthly mortgage insurance premium. A 30-year, $100,000 loan would have a monthly mortgage insurance payment of $70.83. This is calculated by multiplying the loan amount of $100,000 by .0085 and then dividing by 12. Some FHA 15-year mortgages have the monthly mortgage insurance waived.