What is mortgage insurance?

Why do I need PMI?

Private Mortgage Insurance (PMI) protects the lender, not the homebuyer. If the homebuyer doesn’t make the monthly mortgage payments, the loan defaults and the home goes into foreclosure. The insurance company then pays the mortgage lender. That’s why lenders usually require insurance on low down payment loans. It protects them from financial loss. The advantage to homebuyers is that they can get loans without having a down payment of 20 percent.

Although mortgage insurance is paid by the homebuyer, the mortgage insurer works directly with the mortgage lender. Conventional home loans usually require a minimum down payment of five percent. But if you pay less than 20 percent down, you'll be required to make monthly PMI payments. PMI will be automatically removed on conventional loans once you have paid your loan down to 78 percent. Other factors go into getting PMI removed, including whether your home has increased in market value. Talk with a mortgage loan expert for information about PMI payments.

Do government-backed loans require mortgage insurance?

When you take out a government-backed home loan, the mortgage insurance is different depending on which type of loan you get.

A Federal Housing Administration (FHA) loan has down-payments as low as 3.5 percent, but they require you to pay two types of mortgage insurance. You must pay an upfront payment (about 1.75 percent of your home loan) and make monthly insurance payments. Unlike private mortgage insurance, the monthly payments cannot be canceled for the life of the loan.

A Veterans Administration (VA) home loan can have 0 percent down but not require monthly mortgage insurance payments. This reduces the size of monthly payments and saves the homebuyer money over time. However, the VA collects an upfront funding fee.

Again, mortgage insurance can get involved, so get specific information from a mortgage expert. TwinStar’s Mortgage Loan Officers will be happy to answer your questions.