Mortgage Insurance: What is it?

Anyone who has taken out a home loan and has not put a down payment of 20% is subject to Mortgage Insurance. This is commonly referred to as PMI or Private Mortgage Insurance.  Mortgage Insurance protects the lender and not you as the new home buyer.  Mortgage Insurance has nothing to do with your home insurance.  If you have been required to add this to your monthly loan payment, you know that PMI can be very expensive. As in, hundreds of dollars expensive.

How much you pay for PMI depends on two factors: your total loan amount and your credit score. The lower your credit score, the higher you will pay for PMI. As an example, for a $350,000 purchase, you are likely to pay between $200 and $500 a month for PMI. You could pay a little less, you could pay a little more. This PMI figure will be used to factored in your approval of your new home loan.

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. If you default on your loan, the PMI will pay a portion of the defaulted loan to the lender. Thus the insurance for your mortgage.

To be clear, as a new home buyer, you are paying insurance for the lender.  Seem right?  No, it doesn’t.  This increases the cost of your loan.  Mortgage Insurance provides no benefit to you.  However, if don’t have the available money for a 20% down payment on the home that you want to purchase, than it is one of the only requirements to qualify for the home that you want. The benefit explanation that you might receive from your Loan Officer is that you would not be able to purchase a home without it.  

 If you are required to pay mortgage insurance, it will be most typically be included in your total monthly payments that you make to your lender, your costs at closing, or both.

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