You may have heard you will need to pay mortgage insurance with your home loan. What does this mean, why is it required, and what can you expect? Read to learn these answers!
What is Mortgage Insurance?
Mortgage insurance is a requirement for some home loan scenarios or products. It is paid by the borrower and is a means to protect the lender in the event the borrower defaults on the loan.
History of Mortgage Insurance
Traditionally, individuals were required to make a down payment of 20% of a home's purchase price in order to qualify for a home loan. This large down payment decreased risk to the lender in the event the borrower should default on the loan.
A 20% down payment can be a major hurdle to many potential home buyers. For example, consider a home priced at $390,000. Twenty percent of this is $78,000, which is not realistic for many otherwise qualified borrowers.
Additional loan options have evolved over time that require a significantly lower down payment. This has opened up the reality of home ownership to a much larger pool of buyers. However, the lower down payment requirement also comes with a much greater risk to the lender. Mortgage insurance allows options for those borrowers who need lower down payment options, and it also provides protection for the lenders willing to fund such programs.
When Do I Pay Mortgage Insurance?
A borrower will pay mortgage insurance if:
- They put less than 20% down on a conventional loan
- They utilize an FHA loan
USDA and VA loan products do not require mortgage insurance.
What Can I Expect with Mortgage Insurance?
While mortgage insurance requirements vary slightly depending on loan type, they typically require a monthly payment from the borrower that is a percentage of the loan amount called the mortgage insurance factor.
You will not necessarily pay mortgage insurance forever. For conventional loan products, you can request to have your mortgage insurance dropped when your equity in the home is at least 20 percent. If you have questions on your equity, you can track it for free or reach out to a mortgage professional to check in on this. For FHA loans, you will likely be required to pay mortgage insurance over the life of the loan. However, in the future it may be an option to refinance into a conventional product that no longer requires mortgage insurance. Reach out to a mortgage professional to ask if this is an option for your scenario.
What Do I Do Next?
No matter what stage you are at in your homeownership journey, communicating with a trusted mortgage professional along the way is essential. Your options will evolve over time as you grow your income, credit, and assets; and loan programs and requirements change over the years as well.
If you are in Arizona, our locally owned team at O Capital Group is here to listen to your goals and answer any questions you may have. Reach out today!
At O Capital Group, we make home loans easy!
Call today: (602) 492-8930
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This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
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