Ask A Loan Expert: What Is Mortgage Insurance?

What is mortgage insurance?

People have a lot of questions about home loans, as they rightly should. It’s one of the biggest financial investments of your life, and no one wants to end up stuck in a bad situation. 

We’re passionate about answering home loan questions at Bison State Bank, and we get them from all over. Clients, family members, friends, even people at the grocery store. Everyone has a burning question about home loans and craves a better understanding of how they work.

Of all the questions we field, “what is mortgage insurance” might top the list. So we’ve put together this blog to answer that question and explain what exactly mortgage insurance is, when it applies, and how it benefits both lenders and borrowers. 

If you have any other burning mortgage questions or want to talk with one of our friendly and knowledgeable loan officers, feel free to reach out to Bison State Bank any time!

So, what is mortgage insurance?

Let’s get right to the chase, shall we? Mortgage insurance is essentially a safety net for lenders because it protects them from borrowers who stop making payments on their loans. There are multiple kinds of mortgage insurance—we’ll get to that in a second—but all of them protect lenders from defaulted payment. 

Mortgage insurance also protects lenders in case a borrower passes away or cannot meet their contractual payment obligations for other reasons. Borrowers who fall behind on their payments could suffer damage to their credit score or, in the worst cases, lose their homes through foreclosure. 

Related: What’s the best credit score for buying a house?

When does a lender require mortgage insurance?

In the past, home loans often required borrowers to pay 20% down upfront, along with other closing costs. These days, even well-off people struggle with having a 20% down payment ready at closing, and that’s where mortgage insurance comes in handy. 

Related: How much should you put down on a house?

Most lenders require mortgage insurance when borrowers make a down payment of less than 20% of the purchase price. All FHA and USDA home loans also require mortgage insurance. This insurance is often added to your total monthly payment costs, your closing costs, or both. 

Private mortgage insurance

This insurance, typically referred to as PMI, is arranged by your lender and provided by a private insurance company. It usually accompanies a conventional loan with less than a 20% down payment, and you pay it on a monthly premium. 

In most cases, once you’ve reached 20% equity on your home, you can remove your PMI either by request or through refinancing your mortgage.

Related: When to refinance your home

FHA and USDA loan insurance

With an FHA or USDA loan, you’re actually loaning money directly from the United States government. Both of these options are great for people with lower income, and with USDA loans you might not require any down payment at all. FHA loans require as little as a 3.5% down payment, and have one of the lowest average down payments on a house

Both USDA and FHA mortgage insurance requires a payment upfront at closing and a monthly fee placed on your monthly mortgage payment. You can roll the upfront fee into your mortgage payment instead of paying out of pocket, but that will also increase your overall cost of your loan. 

Related: More on the different types of mortgage loans

How does mortgage insurance benefit the borrower?

We’ve established that mortgage insurance is meant to protect lenders from borrowers not making payments, but it does have a large benefit to potential homeowners, too. 

If not for mortgage insurance, essentially every loan would require a down payment of at least 20% of the purchase cost. For example: If you want to purchase a home for $350,000, without mortgage insurance as an option you would owe $70,000 as your down payment, not to mention another 3-6% in closing costs!

With mortgage insurance as a first-time homebuyer on a conventional loan, you can pay as low as a 3% down payment. That makes your initial down payment $10,500 on the same $350,000 loan, significantly reducing your barrier to entry. 

Bring all your burning mortgage questions to Bison State Bank

There are plenty of questions similar to ones like what is mortgage insurance, and our home loan experts at Bison State Bank can answer them all! 

We are seasoned professionals in this industry with the experience needed to guide clients to the best down payment option for their needs. We’re passionate about finding the right home loan solutions for your unique situation.

Contact us today to see how our process and passion can deliver your perfect home loan.

A special thank you to our Director of Training and Development Originator, Emily Sappingfield, for providing her expertise on this topic.