Mortgage insurance protects lenders and borrowers against losses due to defaults on mortgage loans. There are several types of mortgage insurance available, including lender-paid, borrower-paid, and split-premium policies. In addition to the traditional forms of mortgage insurance, many lenders require additional insurance on Federal Housing Authority loans.
In most cases, mortgage insurance costs a percentage of the loan balance. The premium is usually between 0.5 and 1% of the loan balance per year. Mortgage insurance is required on loans where the borrower has less than 20% down payment. For example, a $250,000 mortgage will cost between $1,250 and $2,500 a year, or $104 to $208 per month.
Mortgage insurance is different from other types of insurance. While other types of insurance cover the policyholder and reimburse them for covered expenses, mortgage insurance is specifically designed to protect the lender. Lenders need mortgage insurance because they are concerned about recouping their losses in the event that a borrower defaults on their payments. Mortgage insurance covers the lender, the mortgage lender, and the titleholder in the event of death or disability.
Usually, mortgage insurance premiums are paid at closing. However, in some cases, a borrower can finance the premium as part of the mortgage. The cost of upfront mortgage insurance can add up as a homeowner’s loan balance increases, so it is important to consider the upfront costs. If a homeowner has more than 20% equity in their home, it is possible to cancel PMI early. A lender may require an appraisal before canceling the policy.