Mortgage Insurance
Definition and meaning of Mortgage Insurance in real estate.
Mortgage insurance is a policy that protects the lender against financial loss if a borrower defaults on their home loan.
In more detail
Lenders typically require this insurance when a buyer makes a down payment of less than twenty percent on a home purchase. For conventional loans, this is called private mortgage insurance, which can be canceled once the borrower reaches twenty percent equity in the property. Government-backed loans, such as FHA loans, require their own version of mortgage insurance that often lasts for the entire life of the loan.
The premium is usually added to the borrower's monthly mortgage payment, increasing the overall cost of homeownership but allowing buyers to purchase homes with smaller down payments.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Required For | Down payments of less than twenty percent on conventional loans |
| Beneficiary | The lender, who is protected from financial loss if the borrower defaults |
| Common Types | Private Mortgage Insurance (PMI) and Mortgage Insurance Premium (MIP) |
A buyer puts down five percent on a house and pays a monthly private mortgage insurance premium until their loan balance drops to eighty percent of the home's value.
Frequently asked questions
How do I get rid of private mortgage insurance?
For conventional loans, you can request cancellation once your loan-to-value ratio reaches eighty percent, or it will automatically terminate when it reaches seventy-eight percent.
Does mortgage insurance protect the home buyer?
No, mortgage insurance solely protects the lender, if you default and face foreclosure, the policy does not pay your mortgage or protect your credit.