Mortgage Insurance

What is mortgage insurance, and who does it protect?

Mortgage insurance protects the lender if you fall behind on your mortgage payments. It doesn't protect you, and you can still lose your home through foreclosure.

Say your home is sold through foreclosure, and the sale doesn't cover what you owe. Mortgage insurance pays the difference to the company that holds your mortgage.

Mortgage insurance lowers the lender's risk. That can help you qualify for a loan you might not get otherwise, but it also raises the cost of your loan.

You typically need mortgage insurance when your down payment is less than 20 percent of the home's price. It's also required on all FHA loans. You pay for it in your monthly payment, at closing, or both.

Sources: Consumer Financial Protection Bureau, "What is mortgage insurance and how does it work?"; Consumer Financial Protection Bureau, "What is private mortgage insurance?"; Consumer Financial Protection Bureau, "FHA loans"

What is private mortgage insurance?

Private mortgage insurance, or PMI, is mortgage insurance on a conventional loan. Your lender arranges it, and a private insurance company provides it.

You might have to buy PMI if your down payment on a conventional loan is less than 20 percent of the price. When you refinance a conventional loan, PMI usually applies if your equity is less than 20 percent of your home's value.

Fannie Mae is one of the companies that back conforming conventional loans. Its rules require mortgage insurance when a conventional first mortgage is more than 80 percent of the home's value, unless the lender uses another kind of protection Fannie Mae allows.

The most common way to pay for PMI is a monthly premium added to your mortgage payment. You can also pay a one-time premium at closing, or a mix of both. If you pay up front and then move or refinance, you might not get a refund.

Sources: Consumer Financial Protection Bureau, "What is private mortgage insurance?"; Fannie Mae, "B7-1-01, Provision of Mortgage Insurance"; Consumer Financial Protection Bureau, "Conventional loans"

When does private mortgage insurance end?

Private mortgage insurance can be canceled or must end at points set by a federal law, the Homeowners Protection Act. The rules cover loans on single-family homes you live in as your main home that closed on or after July 29, 1999.

You can ask your servicer in writing to cancel PMI once your balance is scheduled to reach 80 percent of the home's original value. Your servicer must agree if you're current, have a good payment history, have no second mortgage or other junior lien, and can show the home's value hasn't dropped below its original value. Original value is generally the lower of the sales price or the appraised value when you bought the home.

Your servicer generally must end PMI on its own when your balance is scheduled to reach 78 percent of the original value. PMI must also end the month after the halfway point of your loan's original term, even if you haven't reached 78 percent. Both of these require you to be current on your payments.

FHA loans, VA loans, and loans where the lender pays for the mortgage insurance follow different rules. Fannie Mae and Freddie Mac can set their own PMI cancellation guidelines, but those guidelines can't be less favorable to you than the law's rules.

Sources: Consumer Financial Protection Bureau, "When can I remove private mortgage insurance (PMI) from my loan?"; Consumer Financial Protection Bureau, "Homeowners Protection Act (HPA or PMI cancellation act) examination procedures"

How does FHA mortgage insurance work?

The FHA mortgage insurance premium, or MIP, is required on all FHA loans. You pay an upfront premium at closing and a monthly premium as part of your mortgage payment. Both go to the Federal Housing Administration.

Your credit score doesn't change the price of FHA mortgage insurance. You can add the upfront premium to your loan instead of paying it in cash. That raises your loan amount and the total cost of your loan.

How long the monthly premium lasts depends on the loan's term and on how much you borrowed compared with the home's value when the loan was made.

HUD says the FHA mortgage insurance agreement is between FHA and your mortgage company. HUD tells homeowners to ask their mortgage company what it requires to drop the insurance.

Sources: Consumer Financial Protection Bureau, "What is mortgage insurance and how does it work?"; Consumer Financial Protection Bureau, "FHA loans"; U.S. Department of Housing and Urban Development, "Single Family Mortgage Insurance Premiums"; U.S. Department of Housing and Urban Development, "Loan Balance at Final MIP Date - Final Monthly MIP Payment Date"

Do VA loans have mortgage insurance?

VA loans don't have monthly mortgage insurance. The VA guarantee takes the place of mortgage insurance, and a VA purchase loan doesn't need PMI or an FHA premium.

Instead, you may need to pay a one-time VA funding fee. VA says the fee helps lower the cost of the loan for taxpayers, since the VA home loan program doesn't require down payments or monthly mortgage insurance.

The VA funding fee depends on the type of loan and the loan amount. You can pay it at closing or add it to your loan. Some people don't pay it at all, such as Veterans who receive VA compensation for a service-connected disability.

Sources: Consumer Financial Protection Bureau, "What is mortgage insurance and how does it work?"; U.S. Department of Veterans Affairs, "VA funding fee and loan closing costs"; U.S. Department of Veterans Affairs, "Purchase loan"