Typically, borrowers making a down payment of less than 20 percent of the purchase price of the home need to pay for mortgage insurance. Mortgage insurance also is typically required on Federal Housing Administration (FHA) and U.S. Department of Agriculture (USDA) loans. Mortgage insurance lowers the risk to the lender of making a loan to you, so you can qualify for a loan that you might not otherwise be able to get. But, it increases the cost of your loan. If you are required to pay mortgage insurance, it is included in your total monthly payment that you make to your lender, your costs at closing, or both.
Does mortgage insurance protect the lender or the borrower?
Mortgage insurance, no matter what kind, protects the lender – not you – in the event that you fall behind on your payments. If you fall behind, your credit score could suffer and you can lose your home through foreclosure. Then, in the worst-case scenario, supposing your property is sold through foreclosure and the sale is not enough to cover your mortgage balance in full, mortgage insurance makes up the difference so that the company that holds your mortgage is repaid the full amount.
There are several different kinds of loans available to borrowers with low down payments. Depending on what kind of loan you get, you’ll pay for mortgage insurance in different ways.
Loan types and mortgage insurance
Conventional loan
If you get a conventional loan, your lender could arrange for mortgage insurance with a private company. Private mortgage insurance (PMI) rates vary by down payment amount and credit score but are generally cheaper than FHA rates for borrowers with good credit. Most private mortgage insurance is paid monthly, with little or no initial payment required at closing. Under certain circ*mstances, you can cancel your PMI.
Federal Housing Administration (FHA) loan
If you get a Federal Housing Administration (FHA) loan, your mortgage insurance premiums are paid to the FHA. FHA mortgage insurance is required for all FHA loans. It costs the same no matter your credit score, with only a slight increase in price for down payments less than five percent. FHA mortgage insurance includes both an upfront cost, paid as part of your closing costs, and a monthly cost, included in your monthly payment.
If you don’t have enough cash on hand to pay the upfront fee, you are allowed to roll the fee into your mortgage instead of paying it out of pocket. If you do this, your loan amount and the overall cost of your loan increases.
U.S. Department of Agriculture (USDA) loan
If you get a U.S. Department of Agriculture (USDA) loan, the program is similar to the Federal Housing Administration, but typically cheaper. You pay for the insurance both at closing and as part of your monthly payment. Like with FHA loans, you can roll the upfront portion of the insurance premium into your mortgage instead of paying it out of pocket, but doing so increases both your loan amount and your overall costs.
Department of Veterans’ Affairs (VA)-backed loan
If you get a Department of Veterans’ Affairs (VA)-backed loan, the VA guarantee replaces mortgage insurance, and functions similarly. With VA-backed loans, which are loans intended to help servicemembers, veterans, and their families, there is no monthly mortgage insurance premium. However, you pay an upfront “funding fee.” The amount of that fee varies based on:
- Your type of military service
- Your down payment amount
- Your disability status
- Whether you’re buying a home or refinancing
- Whether this is your first VA loan, or you’ve had a VA loan before
Like with FHA and USDA loans, you can roll the upfront fee into your mortgage instead of paying it out of pocket, but doing so increases both your loan amount and your overall costs.
Beware of "piggyback" second mortgages
As an alternative to mortgage insurance, some lenders may offer what is known as a “piggyback” second mortgage.
This option may be marketed as being cheaper, but that doesn’t necessarily mean it is. Always compare the total cost before making a final decision. Learn more about piggyback second mortgages.
How to get help
If you’re behind on your mortgage, or having a hard time making payments, you can use the CFPB's Find a Counselor tool to get a list of HUD-approved housing counseling agencies in your area. You can also call the HOPE™ Hotline, open 24 hours a day, seven days a week, at (888) 995-HOPE (4673).
FAQs
Mortgage insurance lowers the risk to the lender of making a loan to you, so you can qualify for a loan that you might not otherwise be able to get. Typically, borrowers making a down payment of less than 20 percent of the purchase price of the home need to pay for mortgage insurance.
What is mortgage insurance and how does it work? ›
Mortgage insurance is an insurance policy that protects a mortgage lender or titleholder if the borrower defaults on payments, passes away, or is otherwise unable to meet the contractual obligations of the mortgage.
How does mortgage protection insurance work? ›
MPI is a type of insurance policy that helps your family make your monthly mortgage payments if you – the policyholder and mortgage borrower – die before your mortgage is fully paid off. Certain MPI policies also offer coverage for a limited time if you lose your job or become disabled after an accident.
What is CFPB in mortgage? ›
We're the Consumer Financial Protection Bureau (CFPB), a U.S. government agency that makes sure banks, lenders, and other financial companies treat you fairly.
What is the purpose of PMI? ›
Private mortgage insurance (PMI) is a type of mortgage insurance you might be required to buy if you take out a conventional loan with a down payment of less than 20 percent of the purchase price. PMI protects the lender—not you—if you stop making payments on your loan.
What is mortgage insurance and how can you avoid it? ›
Private mortgage insurance, or PMI, is insurance coverage that protects the lender in case a borrower defaults on a home loan. Typically, a lender will require you to pay for PMI if your down payment is less than 20% on a conventional mortgage. You can get rid of PMI after you build up enough equity in your home.
What is mortgage insurance and how long does it last? ›
Private mortgage insurance (PMI) is an extra monthly fee that you pay on a conventional mortgage if you put less than 20 percent down. PMI must be terminated at a certain point in your loan term or when your mortgage balance drops to a certain percentage of your home's worth.
Does the CFPB regulate mortgage companies? ›
The CFPB also has the authority to oversee nonbank compliance, regardless of size, in certain specific markets: mortgage companies (originators, brokers, and servicers, as well as providers of loan modification or foreclosure relief services); payday lenders; and private education lenders.
What power does the CFPB have? ›
The CFPB supervises a range of companies to assess their compliance with federal consumer financial laws. We have supervisory authority over banks, thrifts, and credit unions with assets over $10 billion, as well as their affiliates.
What does CFPB enforce? ›
The CFPB implements and enforces federal consumer financial laws to ensure that all consumers have access to markets for consumer financial products and services that are fair, transparent, and competitive.
Mortgage insurance costs vary by loan program (see the table below). But in general, the cost of private mortgage insurance, or PMI, is about 0.5 to 1.5% of the loan amount per year. This annual premium is broken into monthly installments, which are added to your monthly mortgage payment.
How much does PMI cost per month? ›
Your total private mortgage insurance amount will always be a percentage of your total mortgage. The average PMI costs are between 0.22% and 2.25% of your mortgage. But your exact percentage will depend on your lender as well as your own financial situation.
How much is mortgage insurance cost? ›
Regardless of the value of a home, most mortgage insurance premiums cost between 0.5% and as much as 5% of the original amount of a mortgage loan per year. That means if $150,000 was borrowed and the annual premiums cost 1%, the borrower would have to pay $1,500 each year ($125 per month) to insurance their mortgage.
Do I really need to pay mortgage insurance? ›
Mortgage insurance lowers the risk to the lender of making a loan to you, so you can qualify for a loan that you might not otherwise be able to get. Typically, borrowers making a down payment of less than 20 percent of the purchase price of the home need to pay for mortgage insurance.
Do you get mortgage insurance back? ›
If the mortgage insurance was financed at the time of origination and is canceled prior to its maturity you may be entitled to a refund if the refundable option was chosen at the time of origination. However, if there was no refund/limited option, this would negate any option for a refund.
Does mortgage insurance pay off loan? ›
Rather than paying out a death benefit to your beneficiaries after you die as traditional life insurance does, mortgage life insurance only pays off a mortgage when the borrower dies as long as the loan still exists. This is a big benefit to your heirs if you die and leave behind a balance on your mortgage.
Do I still need to pay mortgage insurance? ›
After you've bought the home, you can typically request to stop paying PMI once you've reached 20% equity in your home. PMI is often canceled automatically once you've reached 22% equity. PMI only applies to conventional loans. Other types of loans often include their own types of mortgage insurance.
