Buying a home is one of the biggest investments you’ll ever make, and it’s important to protect that investment. One way to do so is by getting home mortgage insurance. In this article, we’ll discuss what home mortgage insurance is, why you might need it, and how to choose the right coverage for your needs.
What is Home Mortgage Insurance?
Home mortgage insurance, also known as private mortgage insurance (PMI), is a type of insurance that protects lenders in case borrowers default on their loans. If you put down less than 20% of your home’s purchase price, your lender will typically require you to get mortgage insurance to protect their investment.
Mortgage insurance can take different forms. There are four primary types:
Type of Mortgage Insurance |
Description |
|---|---|
Borrower-Paid Mortgage Insurance (BPMI) |
The borrower pays the insurance premium as part of their monthly mortgage payment. |
Lender-Paid Mortgage Insurance (LPMI) |
The lender pays the insurance premium upfront and passes the cost onto the borrower through a slightly higher interest rate. |
Single Premium Mortgage Insurance (SPMI) |
The borrower pays the insurance premium as a lump sum at closing. |
Split Premium Mortgage Insurance (Split PMI) |
The borrower pays a portion of the premium upfront and the remainder is paid monthly along with the mortgage payment. |
Why Might You Need Home Mortgage Insurance?
If you don’t have enough money for a 20% down payment, your lender will likely require you to get mortgage insurance to protect their investment. Mortgage insurance protects the lender by providing coverage for the unpaid principal balance in the event of default.
In addition, mortgage insurance can help you get approved for a loan you might not otherwise be able to qualify for. Without mortgage insurance, lenders might not be willing to take on the added risk of lending you money without a substantial down payment.
How Do You Choose the Right Home Mortgage Insurance?
When choosing a mortgage insurance policy, it’s important to consider the following factors:
- The type of mortgage insurance that best fits your needs
- The cost of the insurance premium
- The terms of the policy, including the length of coverage and any exclusions
- The size of your down payment
- Your overall financial situation
Type of Mortgage Insurance
As we discussed earlier, there are four primary types of mortgage insurance. Each type has its own pros and cons, so it’s important to choose the one that best fits your needs.
BPMI may be the easiest type of mortgage insurance to understand. With BPMI, you pay an additional monthly premium alongside your mortgage payment. This premium is based on the size of your down payment, loan amount, and other factors. As you pay down your mortgage, your PMI premium decreases.
LPMI is similar to BPMI, but instead of paying a separate premium, your lender pays an upfront amount to cover the cost of mortgage insurance. You’ll typically see this as a slightly higher interest rate on your loan. This can be a good option if you plan to stay in your home for a long time, as the cost of LPMI is spread out over the life of the loan.
SPMI is a lump-sum payment you make at closing. This can be a good option if you have a significant amount of cash on hand and want to reduce your monthly mortgage payment. However, paying a large lump sum upfront can be a challenge for some borrowers.
Split PMI is a hybrid of BPMI and SPMI. You pay a portion of the premium upfront and the remainder is spread out over your monthly mortgage payment. This option can provide some flexibility and can be a good choice if you don’t have a lot of cash on hand but want to reduce your monthly payment.
Cost of the Insurance Premium
When choosing a mortgage insurance policy, it’s important to consider the cost of the insurance premium. Depending on the type of policy you choose, your premium may be paid as a lump sum at closing or as part of your monthly mortgage payment.
It’s important to remember that you’ll be paying for mortgage insurance until you reach 20% equity in your home. This means that even if you choose a policy with a low premium, you’ll still be paying for it for several years.
Terms of the Policy
When choosing a mortgage insurance policy, it’s important to read the fine print and understand the terms of the policy. This includes the length of coverage and any exclusions.
Most mortgage insurance policies will provide coverage until you reach 20% equity in your home. However, if you have an FHA loan, you’ll be required to pay mortgage insurance for the life of the loan.
It’s also important to understand any exclusions in your policy. For example, some policies may not cover losses due to earthquakes or floods, so you may need to purchase separate insurance to protect against these risks.
Size of Your Down Payment
The size of your down payment will also affect your choice of mortgage insurance policy. If you put down a larger down payment, you may be able to avoid mortgage insurance altogether. However, if you don’t have enough money for a 20% down payment, you’ll need to choose a mortgage insurance policy that best fits your needs.
Your Overall Financial Situation
Finally, it’s important to consider your overall financial situation when choosing a mortgage insurance policy. Your mortgage payment is just one part of your monthly expenses, so it’s important to make sure you can afford the premium and still have enough money left over for other expenses.
When choosing a mortgage insurance policy, take the time to carefully consider your options and choose the one that best fits your needs and budget.
FAQ About Home Mortgage Insurance
What is the difference between mortgage insurance and homeowners insurance?
Mortgage insurance is designed to protect the lender in case you default on your loan. Homeowners insurance, on the other hand, is designed to protect you in case of damage to your home, theft, or other losses.
Do I have to pay mortgage insurance even if I put down a large down payment?
If you put down at least 20% of your home’s purchase price, you may not need to pay mortgage insurance. However, the specific requirements may vary depending on the type of loan you have and your lender’s policies.
Can I cancel my mortgage insurance?
Once you reach 20% equity in your home, you may be able to cancel your mortgage insurance. However, this will depend on the specific terms of your policy and the type of loan you have.
What happens if I default on my loan?
If you default on your loan, your lender may be able to foreclose on your home. Mortgage insurance will provide coverage for the remaining balance on your loan, but it will not prevent foreclosure.
How do I know which type of mortgage insurance is right for me?
The best way to choose the right type of mortgage insurance is to talk to your lender and carefully consider your options. Take the time to review the cost of each type of policy, the terms and exclusions, and how they fit into your overall financial situation.
In summary, home mortgage insurance can provide valuable protection for both lenders and borrowers. By understanding the different types of mortgage insurance and carefully considering your options, you can choose the policy that best fits your needs and budget.