What Is Mortgage Insurance and Why Do Lenders Require It?

Mortgage insurance is a policy that protects the lender, not the borrower, if a homeowner defaults on a loan. Understanding what is mortgage insurance helps buyers anticipate extra costs and choose the right loan program. This coverage is common in the United States and several other markets, and it directly affects monthly payments.

How Mortgage Insurance Works

When a borrower makes a small down payment, the lender faces higher risk. Mortgage insurance compensates the lender for part of the loss if foreclosure occurs. The borrower pays the premiums, usually added to the monthly payment, but receives no direct payout. The policy simply makes approval possible for buyers who cannot put down 20 percent.

There are several types. Private mortgage insurance (PMI) applies to conventional loans. Mortgage insurance premiums (MIP) apply to FHA loans. VA loans use a funding fee instead. Each structure changes the total cost of borrowing.

When You Pay for Mortgage Insurance

Most lenders require mortgage insurance when the down payment is below 20 percent of the home price. For conventional loans, PMI can often be removed once the borrower reaches 20 percent equity. For FHA loans, MIP usually lasts for the life of the loan unless the borrower refinances.

Premiums depend on the loan amount, credit score, and loan-to-value ratio. Annual costs typically range from 0.3 to 1.5 percent of the loan balance. Borrowers should compare quotes and ask about cancellation rules before signing.

Key Takeaways

Mortgage insurance protects the lender and expands access to homeownership. It is not the same as homeowners insurance, which covers property damage. Knowing what is mortgage insurance means knowing when it can be canceled and how much it adds to your payment.

Compare loan programs and calculate your mortgage insurance costs today to choose the most affordable option. Перейти к подборке →