What is Mortgage Insurance?

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Norah Tanner, part of the Houzd Mortgage Team, is back to explain mortgage insurance. She’ll discuss what it is, why it exists, and when you may be able to remove it from your loan payments.

If you’re buying a home and you don’t have a big down payment saved, you might run into something called mortgage insurance. A lot of people hear that term and think it’s insurance for them, but it’s actually there to protect the lender in case you can’t make your payments. While it doesn’t cover you directly, it can be the thing that makes homeownership possible sooner because it lets you buy with less money down.

How long you have to pay for it depends on the type of loan you get. If you have a conventional loan backed by Fannie Mae or Freddie Mac, your mortgage insurance is called private mortgage insurance, or PMI. You’ll have it if your down payment is under 20 percent, and it’s added right into your monthly mortgage payment.

The good news is that PMI doesn’t last forever. Your lender is required to take it off automatically once your loan balance drops to 78 percent of your home’s original value, and you can even ask for it to be removed at 80 percent. If your home’s value has gone up since you bought it, you might be able to get rid of PMI even sooner by asking your lender to review your loan.

FHA loans work a little differently. Their version is called a mortgage insurance premium, or MIP, and how long you keep it depends on your down payment. If you put down less than 10 percent, MIP stays for the life of the loan unless you refinance. If you put down 10 percent or more, it will drop off after 11 years.

VA loans are a bit of a dream when it comes to this — they don’t have monthly mortgage insurance at all. Instead, there’s a one-time funding fee (and some borrowers, like those with service-related disabilities, don’t even have to pay that).

USDA loans also skip monthly mortgage insurance, but they do have an annual fee that works kind of like it, and that fee sticks around for the entire loan.

Mortgage insurance can feel like yet another cost when you’re buying a home, but knowing when it will go away can help you plan ahead and save money. Check your loan type, watch your loan balance, and don’t be afraid to ask your lender when you can drop it. That little conversation could be worth hundreds of dollars a month in the future.