When Is Mortgage Insurance Required?
Mortgage insurance and homeowners insurance are two separate policies. Mortgage insurance is designed to protect the lender if you default on your home loan. However, the borrower must pay the insurance premiums under certain circumstances.
If you have questions about mortgage insurance or how this product works, contact the agents at KSA Insurance Agency in Chicago, Illinois.
How Does Mortgage Insurance Work?
If you fall behind on your house payments and the lender forecloses on your loan, you may owe more than the amount of money the lender can recover by selling the house.
Mortgage insurance helps the lender recover lost funds if they lose money on the sale of a foreclosed home.
Do I Need Mortgage Insurance?
Unless your lender or the program administrator for your home loan requires mortgage insurance, you do not need to worry about this additional cost.
Several home loan types may require mortgage insurance:
Federal Housing Administration (FHA) loan: The borrower must pay mortgage insurance premiums (MIPs) to the FHA with an FHA loan. There’s an upfront mortgage insurance premium and an annual fee for the entire loan term. If you make a down payment of less than 5% of the loan, your mortgage insurance premiums may be slightly higher than if you made a larger down payment.
Conventional loan: If you make a down payment of less than 20% on a conventional loan, the lender may require that you pay for private mortgage insurance (PMI) until you have 20% equity in the home.
US Department of Agriculture (USDA) loan: You’ll also pay mortgage insurance with a USDA loan. There’s a one-time upfront fee that you can roll into your total loan amount and ongoing yearly premiums.
Department of Veterans Affairs (VA)-backed loan: If you are eligible for a VA loan, you won’t pay monthly mortgage insurance premiums, but there is a required upfront “funding fee” that varies according to your down payment amount, whether you are disabled, your military service record and whether you’ve had a VA loan in the past.
Talk With Your Agent About Your Homeowners Insurance Policy
While mortgage insurance may be a requirement, you have some flexibility regarding the types of homeowners insurance you purchase to help protect your investment in your home. Talk with the agents at KSA Insurance Agency today for help shopping for cost-effective homeowners insurance.