Mortgage insurance is a type of insurance policy that protects and reinforces lenders in the event that a borrower does not comply on their mortgage payments. When a borrower takes out a mortgage loan, the lender may require them to purchase mortgage insurance as a condition of the loan. It is typically required when the borrower has a down payment of less than 20% of the home’s purchase price.

Mortgage insurance is very important to the lender because mortgage loans are typically large, long-term loans with a high degree of risk.

Types of mortgage insurance

There are 2 main types of mortgage insurance, private mortgage insurance (PMI) and Mortgage insurance premium (MIP).

Private Mortgage Insurance (PMI)

This type of insurance is usually required by lenders when the borrower puts down less than 20% on the purchase price of the home. PMI premiums can be paid by the borrower upfront or can be added to the monthly mortgage payment.

The cost of PMI varies depending on the size of the down payment, the loan amount, the amount of the mortgage and the borrower’s credit score. The cost however ranges between 0.3% and 1.5% of the original loan amount per year.

The main purpose of PMI is to protect the interest of the lender. If a borrower defaults on their mortgage, the PMI policy will pay out to the lender to cover any losses accrued. If you’re considering taking out a mortgage with less than a 20% down payment, you should carefully weigh the cost of PMI against the benefits of being able to purchase a home with a smaller down payment.

Mortgage Insurance Premium (MIP)

This type of mortgage insurance is required for borrowers who get loans which are guaranteed or backed by government entities, especially the Federal Housing Administration (FHA. It can also be offered for loans backed by the U.S Department of Veterans Affairs (VA) or the U.S. Department of Agriculture (USDA). This mortgage policy allows for lower down payments.

Mortgage Insurance Premium (MIP) also protects the interest of the lender in case the borrower defaults on their mortgage loan. MIP is the preferred choice for borrowers who have a down payment of less than 20% when purchasing a home, as this is considered a higher risk to lenders.

The cost of MIP varies depending on the loan amount or size of the down payment, the loan-to-value ratio, and the length of the loan. In the case of an FHA loan, the MIP is typically paid as an upfront premium at the time of closing, as well as a monthly premium included in the borrower’s mortgage payment.

Generally, borrowers who make a smaller down payment will pay a higher MIP than those who make a larger down payment. However, in some cases, it may be possible to cancel MIP once a certain amount of equity has been built up in the home.

Tips to find cheap mortgage insurance

If you are looking for the most affordable mortgage insurance policy that is best suited to your needs, you should consider the following tips-

1. Compare the different types of mortgage insurance: carefully consider the better choice between private mortgage insurance (PMI) and government-backed mortgage insurance, such as FHA or VA loans. PMI is typically cheaper than government-backed mortgage insurance, but it may require some additional demands from borrowers.
2. Improve your credit score: Your credit score can have a significant impact on the cost of your mortgage insurance. Improving your credit score could increase your chances of qualifying for lower premium rates.
3. Choose a higher deductible: just as is the case for other types of insurance, choosing a higher deductible can help lower your premiums. However, keep in mind that you’ll be responsible for paying a larger portion of the cost if you need to make a claim.
4. Increase your down payment: The larger your down payment, the less risk the lender takes on. As a result, you may be able to obtain a lower mortgage insurance rate.
5. Choose a shorter loan term: A shorter loan term may result in a lower mortgage insurance rate.
6. Consider a piggyback loan: A piggyback loan is a second mortgage that is used to cover part of the down payment. This can help you avoid mortgage insurance altogether, or obtain a lower mortgage insurance rate
7. Work with a mortgage broker: you can decide to employ the services of a mortgage broker who can help you find the best rates on mortgage insurance by shopping around for you and comparing different quotes.

Top 5 mortgage insurance companies

There are a good number of mortgage insurance companies operating in the market today and who offer very good services, but here are some of the top ones:

Genworth Financial – With over 60 years of experience, Genworth Financial is one of the leading mortgage insurance companies. They provide mortgage insurance for both individual and group clients.

Essent Guaranty – this is a private mortgage insurance company which offers coverage for lenders and helps borrowers obtain mortgages with less than a 20% down payment.

MGIC – MGIC is one of the oldest mortgage insurance companies in the US, founded in 1957. They provide coverage for both government-backed and conventional loans.

Radian – Radian is a mortgage insurance company that provides coverage for lenders, investors, and homeowners. They offer a variety of products including mortgage insurance, risk management services, and mortgage analytics.

Arch MI – Arch MI provides private mortgage insurance to lenders, helping borrowers obtain mortgages with less than a 20% down payment. They offer a variety of products and services to help lenders manage risk and improve their business operations.

How long can my mortgage insurance last

The length of time mortgage insurance lasts depends on the type of mortgage insurance you have purchased.

If you purchase private mortgage insurance (PMI), the insurance will generally be required until you have paid off at least 20% of your home’s original purchase price. After you have paid this off, you can request to have the PMI removed from your mortgage payments.

If you have Federal Housing Administration (FHA) mortgage insurance, which is required on all FHA loans regardless of down payment amount, the insurance will last for the life of the loan if the down payment was less than 10%. If the down payment was 10% or more, the insurance will last for 11 years.

If you have Department of Veterans Affairs (VA) mortgage insurance, which is required on all VA loans, there is no set duration. However, the insurance will typically be waived once you have paid off a certain amount of the loan or once you have enough equity in the home.

The cost of mortgage insurance

The cost of mortgage insurance always varies depending on a number of factors which include the type of mortgage insurance, the amount of the loan, the loan-to-value ratio, the length of the mortgage, and the borrower’s credit score.

For example, if you take out an FHA loan, you will be required to pay an upfront mortgage insurance premium (MIP) equal to 1.75% of the base loan amount, as well as an annual MIP that ranges from 0.45% to 1.05% of the loan amount, depending on the size of the down payment and the length of the loan.

If you have a conventional loan with less than a 20% down payment, you may be required to pay private mortgage insurance (PMI). The cost of PMI varies based on the size of the down payment and the borrower’s credit score, but typically ranges from 0.3% to 1.5% of the loan amount per year.

Finally, it is good to note that mortgage insurance is an added expense that can significantly increase the total cost of homeownership, so borrowers should be aware and weigh all of their options and possibly put down a larger down payment if possible to avoid mortgage insurance altogether.