Mortgage Insurance 101: Your Options Explained

Mortgage insurance can protect lenders and borrowers when financing a home. Here’s an overview of the main mortgage insurance types you may encounter.

Conventional Loan Mortgage Insurance

Conventional loans from private lenders often require private mortgage insurance (PMI) if your down payment is less than 20%.

PMI protects the lender if you default. It’s usually 0.5-1% of the loan amount per year until you reach 20% equity either through payments or home appreciation.

FHA Mortgage Insurance

Federal Housing Administration (FHA) loans need mortgage insurance no matter your down payment size. This upfront and annual mortgage insurance protects the lender.

Upfront mortgage insurance is 1.75% of the base loan amount. Then there’s an annual fee of 0.45% to 1.05% of the loan balance. You pay this until you reach 78% loan-to-value ratio.

VA Funding Fee

Instead of mortgage insurance, VA loans require a VA funding fee typically 1.4-3.6% of the loan amount. This fee helps provide the VA loan guarantee.

Disabled veterans and other applicants may qualify for reduced funding fees. The fee can be rolled into the loan instead of paying upfront.

USDA Annual Fee

For USDA loans, an annual fee of 0.35-1% of the loan balance is charged rather than mortgage insurance.

This annual fee continues for the life of the loan. However, it can be financed into the loan so you don’t have to pay it upfront.

Evaluating the costs of mortgage insurance is key when choosing a loan program. Be sure to discuss options with lenders to find the best fit.

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