What Is Mortgage Insurance?

There are three different types of mortgage insurance you should be aware of. Here’s a quick overview of each type.

1. Borrower-Paid Mortgage Insurance

In most cases, your PMI will be borrower-paid mortgage insurance (BPMI). When lenders talk about PMI, this is usually the type they’re referring to. BPMI is the type of mortgage insurance that’s rolled into your monthly mortgage payment.

Let’s break down how it could affect your costs. Typically, you’ll pay about .5 – 1% of your loan amount per year for PMI. This translates to $1,000 – $2,000 per year in mortgage insurance, or about $83 – $166 per month.

You can cancel the insurance after you have paid more than 20% of the home’s value. For single-family homes, this occurs when you have reached 78% LTV ratio, which means you have paid off 22% of the value of the loan, or when you’ve reached the midpoint of your loan term – that’s 15 years for a 30-year mortgage.

2. Lender-Paid Mortgage Insurance

Lender-paid mortgage insurance (LPMI) means your lender initially pays your mortgage insurance, but your mortgage rate is higher to compensate for that lender payment. The interest rate increase is typically .25 – .5% more for LPMI. You’ll save on monthly payments and you’ll have a lower down payment because you’re not required to have 20% down with LPMI.

The lower your credit score, the higher your interest rate will be. LPMI will cost you more if you have a low credit score. Also, you’ll never be able to cancel LPMI because it’s built into your payment schedule for the entire loan term.

3. FHA Mortgage Insurance Premium

We’ve covered the types of mortgage insurance options for conventional loans, but what about government-backed home loans? Most FHA home loans, which are first-time home buyer loans financed through the federal government, also require the purchase of mortgage insurance, called a mortgage insurance premium (MIP).

In most cases, you pay mortgage insurance for the duration of your loan term unless you make a down payment of 10% or more (in which case, MIP would be removed after 11 years). You’ll need to pay a couple of ways. First, an FHA loan upfront mortgage insurance premium (UFMIP), which is usually about 1.75% of your base loan amount.

Next, you’ll also pay an annual mortgage insurance premium. Annual MIP payments run approximately .45 – 1.05% of the base loan amount.

MIP works similarly to borrower-paid mortgage insurance, but it has a few key differences. Like BPMI, you’ll pay a monthly amount, typically rolled into your mortgage payment.

Here’s how it could work: You’ll pay an upfront payment that is 1.75% of the loan amount. If your home loan is for $200,000, expect to pay $3,500 at the time of closing. Expect to pay an average of .85% of your home loan for MIP throughout the duration of your mortgage. This percentage can run higher, depending on how much of a down payment you put down on your loan.