You’ve got mortgage questions… we’ve got answers! Each week our Home Specialist will answer your mortgage questions.
Question from a potential homeowner:
My husband and I are buying a house—yay! However, there are a lot of costs associated with homeownership beyond just mortgage principal and interest. One cost that came up is Mortgage Insurance. What is that, am I required to have it, and, if not, is it really necessary?
Great mortgage question! Thanks for asking the Home Specialist.
You’re right—there are a lot of costs associated with homeownership, and one of them is mortgage insurance. In simple terms, mortgage insurance is purchased by the homebuyer but doesn’t offer the buyer protection. Instead, it protects the investor should you default on the loan.
Mortgage insurance is required for home loans where the down payment is less than 20 percent. So if you were looking to avoid another fee, the only way to do so is to have a substantial down payment.
There are two types of mortgage insurance depending on your loan:
- Conventional Loans: Private Mortgage Insurance (PMI) - For conventional loans where you can’t provide at least 20 percent down payment, you’ll be required to purchase Private Mortgage Insurance. PMI can be canceled once you pay off at least 20 percent of your loan or refinance when your home’s value increases. PMI typically costs between 0.5% and 1% of your full loan amount.
FHA Loans: Mortgage Insurance Premium (MIP) - For loans received through the Federal Housing Administration, you’ll need to pay a Mortgage Insurance Premium (MIP). Unlike PMI, which can be avoided with a larger down payment, there’s no way to avoid MIP when you have a FHA loan
Your lender will tell you what amount you’ll be paying for mortgage insurance and how much you will have to pay down on your loan before you can cancel mortgage insurance, if you can cancel it.
Now, on the surface, it may seem like mortgage insurance is just another nuisance costs, but it’s not all bad.
- It increases your buying power. With mortgage insurance, you’re not restricted to only looking at homes where you can provide a substantial down payment, allowing you to consider a wider range of options.
- It may be tax deductible. Families who make less than $110,000 a year and itemize their deductions may be able to deduct the cost of PMI on their income taxes. Ask your tax advisor.
- It helps your budget in the future. Once you’re able to cancel your mortgage insurance, you can start applying that amount to your mortgage since it’s already part of your budget. This can help you pay off your loan in a shorter amount of time.
While you might not be able to avoid mortgage insurance , it does provide you with options. If you’re not able to make a 20 percent down payment, it helps you still qualify for certain loans anyhow.
— The Home Specialist