What is Mortgage Insurance?

BY THE PERK LENDING TEAM | July 20, 2023 | 3-minute read

What is mortgage insurance?

Mortgage insurance is a policy that protects lenders from borrowers failing to pay back their loan. Though it is an additional cost for you, the borrower, mortgage insurance allows you to qualify for a loan you wouldn’t otherwise. You’ll be able to get a mortgage with a smaller down payment and lower credit score.

When do I pay for it?

Typically, mortgage insurance is paid for in monthly premiums which are added to your mortgage payment. However, qualified borrowers have the option to finance their mortgage insurance policy into the loan or pay for the policy upfront.

How much does it cost?

The cost of your mortgage insurance will depend on a few factors, including loan type, credit score, and down payment. Below is the type of mortgage insurance required for each type of loan and the approximate costs.

FHA - Mortgage Insurance Premium (MIP)

All newly issued FHA loans require mortgage insurance. The cost will depend on your loan size and term, but will range from 0.45% to 1.05% of the loan annually (divided into 12 monthly payments). Credit score does not affect the mortgage insurance rate. 

Additionally, FHA loans require an upfront premium of 1.75% to be paid at closing. The borrower can pay the upfront premium out of pocket or finance it into the loan. 

FHA loans with a down payment of 10% or more require mortgage insurance for 11 years. Otherwise, mortgage insurance is required for the life of the loan.

Conventional - Private Mortgage Insurance (PMI)

Private mortgage insurance is usually required for conventional loans with less than a 20% down payment. Once the loan is paid down to 80% of the property’s appraised value, the required mortgage insurance can be dropped. 

The cost for private mortgage insurance is dictated by your credit score, loan-to-value, occupancy type, and other factors. The price can vary widely depending on those factors, going from less than 0.10% to well above 2% of the loan annually.

VA - Funding Fee

VA loans do not require mortgage insurance. However, there will be an initial funding fee to be paid at closing. The funding fee can range from 1.4% to 3.6% of the loan, depending on your down payment and the number of VA loans you’ve had in the past.

USDA - Guarantee Fee

USDA loans require an annual fee of 0.35%. This fee is set by the federal government each year, but will not change over the life of the loan. There is also an upfront guarantee fee of 1% due at closing.

Key takeaways

Regardless of which kind of home loan you need, we will explain any mortgage insurance requirements you may have during the application process. The amount and frequency of premium payments will be disclosed to you in your initial Loan Estimate and Closing Disclosure. If you are ready to get started, you can fill out an application to begin.

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