Homeowners and prospective homeowners probably have more questions about mortgage insurance than any other area of home finance. Here we discuss what constitutes mortgage insurance and how it works.
Your lender takes out mortgage insurance to provide for the possibility that you, the homeowner, will default on your mortgage. There is no connection between mortgage insurance and property or hazard insurance, which is used to insure the property itself against damage from a variety of potential hazards. Nevertheless, many people do tend to use the terms interchangeably. There are two basic types of mortgage loans, and each has its own type of mortgage insurance.
Conventional mortgages are what most people think of when they think of mortgage insurance. They are insured by Fannie Mae or Freddie Mac and are required when there is less than 20% equity in the property. The rate of the mortgage insurance will be based on your level of equity, meaning that your rate will be higher if you have 10% equity than if you have 15% equity. This mortgage insurance can be removed if your equity reaches a certain level.
There are actually two types of mortgage insurance you may have when you obtain an FHA mortgage. The first is called “upfront mortgage insurance,” or, often, “upfront MI.”.
This upfront MI is a percentage of your loan amount and can be financed into your mortgage.
The second type of mortgage insurance is called “monthly mortgage insurance.” Unlike conventional mortgage insurance, it charges the same monthly rate regardless of your down payment. Also unlike conventional MI, monthly mortgage insurance must be in place for at least five years, regardless of the value of the property.
If you’re wondering which type of mortgage insurance applies to you, contact your mortgage professional for details.