What is Mortgage Insurance?
Also known as private mortgage insurance (PMI), this coverage protects mortgage lenders if you default on your loan. As a borrower, you pay a monthly premium to the insurance company. If your home forecloses because you fall behind on mortgage payments, the insurance company compensates the lender to reduce their losses.
The option to buy home loan insurance instead of making a 20 percent down payment has proven incredibly helpful, especially for first-time homebuyers with no equity in a previous home to draw from. The cost of private mortgage insurance is typically 0.58 to 1.86 percent of the original loan amount, adding about $70 in monthly costs per $100,000 borrowed.
Remember, insurance on a home loan protects the lender, not you. If you don’t pay your premiums on time, your credit score will suffer and you could fail to meet the terms of your mortgage, potentially causing you to lose your house. If you’re having trouble making PMI payments, talk to your lender before you fall behind.
Is Private Mortgage Insurance Included with Your Mortgage?
No. PMI is arranged by your mortgage lender, but coverage is provided by a separate insurance company. You’ll need to purchase and pay for it individually, either as a lump sum at closing or over time as monthly premiums. With this in mind, be aware that PMI premiums are often rolled in with your monthly mortgage payments, allowing you to make a single, convenient payment to your mortgage lender and mortgage insurance provider.
When is Mortgage Insurance Required?
Not every homebuyer who takes out a mortgage needs mortgage insurance. Lenders typically require it when the down payment is less than 20 percent of the home purchase price because lending to you presents a greater risk. You might also need to obtain mortgage insurance if you refinance with less than 20 percent equity in your home. Still, PMI requirements vary by financial institution. Some loan programs also allow you to forego mortgage protection insurance, even with a low down payment, so ask your lender for details.
The good news is you may be eligible to cancel your home loan insurance once you’ve made enough mortgage payments to build 20 percent equity. This may take a few months or a few years, depending on the type of mortgage, interest rate, and your monthly payment amount. Check with your lender to learn the process of applying to have PMI removed from your loan.
How Can You Avoid Needing Mortgage Insurance?
There are several ways to eliminate the need for PMI:
- Save for a 20 percent down payment.
- Ask the lender to cover the cost of your private mortgage insurance, often in exchange for a higher interest rate.
- Look into Veterans Affairs (VA) loans and USDA home loans that require low or no PMI premiums.
- Get a piggyback mortgage with an 80/10/10 split. This equates to an 80 percent first mortgage, a 10 percent second mortgage, and a 10 percent down payment.
What is Home Insurance?
Commonly called homeowner’s insurance or hazard insurance, this coverage insures your home and personal belongings against hazards such as fire and smoke, wind and hail, lightning strikes, explosions, vandalism, and theft. The exact perils your plan protects you from, and the types of belongings that are covered, vary, so read your policy carefully before making any assumptions. The average cost of home insurance is about $1,300 per year for $250,000 in dwelling coverage.
Be aware that most standard home policies do not cover sinkholes, floods, and earthquakes. You may need to purchase additional coverage or a standalone policy for protection against these hazards.
If a covered peril damages your home, file a claim and substantiate the damages with photos, purchase receipts, restoration estimates, and other proof. With the proper verification, your insurer will cover the repair costs, minus your deductible, giving you the money you need to rebuild your home and replace your belongings. Without insurance, these costs could be financially devastating.
Is Home Insurance Included with Your Mortgage?
No, homeowner’s insurance is separate from your mortgage. Even if your premiums are lumped together with your mortgage payments, the premiums go to your insurance company, and the mortgage payments go to your lender.
Still, your lender is responsible for ensuring you pay your homeowner’s insurance, so you may be given the option to set up an escrow account to simplify the process. This is where you deposit funds for homeowner’s insurance and property taxes well before they’re due. Your lender then makes these payments on your behalf when the time comes.
When is Home Insurance Required?
Mortgage lenders require you to secure this coverage before approving your loan application. The amount of insurance you need depends on the value of your home and the property inside. Even after you pay off your mortgage, it’s strongly recommended that you maintain your policy to protect you financially from potentially devastating damages that storms and malicious individuals may inflict on your home and belongings.
Apply for a Home Loan
Now that you understand the difference between mortgage insurance and home insurance, you may be ready to begin the home loan process. Financial Concepts Mortgage can help, with over 20 years of experience and a team of outstanding loan officers to answer your questions.
Unlike many larger mortgage companies, we aren’t a mortgage broker; we’re a locally owned mortgage bank. This means we provide in-house loan origination, processing, underwriting, and closing to keep your information private and secure. Contact us at (405) 722-5626 to find out why we’re the best choice for home loans in Oklahoma City!