Mortgage Insurance, often abbreviated as MI, is a type of insurance policy designed to protect lenders from the risk of default and foreclosure. When a borrower takes out a mortgage loan and makes a down payment that is less than 20% of the home’s purchase price, the lender typically requires the borrower to purchase mortgage insurance. This insurance is intended to cover a portion of the lender’s losses in the event that the borrower is unable to continue making mortgage payments and defaults on the loan.
There are two main types of mortgage insurance: Private Mortgage Insurance (PMI) for conventional loans, and Mortgage Insurance Premiums (MIP) for loans insured by the Federal Housing Administration (FHA). PMI is arranged by the borrower and provided by private insurance companies, while MIP is a requirement for all FHA loans, regardless of the size of the down payment.
The cost of mortgage insurance varies based on several factors, including the amount of the down payment, the loan-to-value ratio, the borrower’s credit score, and the type of mortgage. Typically, this cost is included in the borrower’s monthly mortgage payment, and the insurance remains in place until the borrower has built sufficient equity in the property (usually 20% of the home’s value), at which point the insurance can often be canceled, in the case of PMI, or it decreases to a lower cost, in the case of MIP.
Mortgage insurance plays a critical role in the housing market by enabling individuals to purchase homes with smaller down payments, thus expanding home ownership opportunities. However, it is an additional cost for borrowers, and those considering a mortgage with less than a 20% down payment should be aware of this expense when calculating the overall cost of purchasing a home.