In the past, if you wanted to buy a home, you could not get a mortgage if you couldn’t pay 20% of the cost of your home up front. Nowadays, however, you can get a mortgage and put down 15%, 10%—even 5% of your home cost as a deposit. Mortgage insurance makes this possible—but it doesn’t come without cost. If you’re considering buying a home, here are the answers to some of the more frequently asked questions about mortgage insurance.
What is mortgage insurance?
Mortgage insurance is an insurance policy that guarantees that a mortgage will be paid in the event of the mortgagee’s death, default, or disability. It’s used when a buyer wishes to buy a house without putting down a 20% deposit. When putting down less than 20% as a deposit, the lender will require mortgage insurance that protects them in case the buyer can’t repay the loan.
What kinds of mortgage insurance are out there?
There are three kinds you may have to buy, and here’s a breakdown of each:
Private Mortgage Insurance (PMI) is the typical policy provided to private buyers who don’t want to put down a 20% deposit on a home. It’s offered by private insurers, and covers the lender for the additional risk it incurs from lending a high risk-to-value mortgage.
Mortgagee’s Title Insurance is a policy that covers the lender from the risk of property loss due to an ownership dispute or a flaw in the title. This is often required during the buying process, and covers only the lender’s risks.
Mortgagor’s Title Insurance is a policy that protects the buyer in the event of an ownership dispute or title issue that causes the buyer to lose the property. It’s usually supplemental to the mortgagee’s title insurance policy, and the buyer is usually responsible for its premium.
How much will it cost?
The cost of private mortgage insurance varies depending on how much of a down payment the buyer makes. In the past, a significant portion of the premium was demanded up front. However, nowadays the premiums are more commonly paid on an ongoing basis during the life of the mortgage, with the insurer collecting an escrow equal to the first two months’ payments at the beginning of the policy.
The mortgage cost is usually a percentage of the total cost of the mortgage itself, and can be as little as .32% (if you paid, say, a 15% deposit) or as much as 1.5% if you paid significantly less in your deposit.
How is my premium determined?
Consumers are used to being thoroughly assessed for risk before taking out an insurance policy. Auto, health, and other types of insurance typically take into account a buyer’s accident or health history before quoting a premium. You’d expect that, since it’s providing protection against loan default, insurers would use a consumer’s credit history to assess risk, and a higher credit rating would mean a lower premium—right?
Actually, that’s not how it works with mortgage insurance. In this case, insurers only look at the cost of the house and the amount you put down as a deposit. The bigger the ratio—in other words, the lower the percentage you put down as a deposit—the more your mortgage insurance will be. This means that two people putting down the same percentage on two equally-priced houses will pay the same amount in mortgage insurance, regardless of their credit histories.
Will I have a choice in policies?
Typically, no. The lender is usually the one who chooses the insurance company, and the consumer rarely gets a say. In general, however, there is not much difference between policies offered by different companies.
How long do I have to pay mortgage insurance?
You’ll have to pay the premiums until you’ve paid off up to 78% of your mortgage. Once you have, you can cancel the insurance policy.
Do any laws protect my rights as a consumer?
The Homeowners Protection Act of 1998 requires that a mortgage insurance policy must be automatically canceled once the homeowner has paid off 78% of the mortgage. It also requires that the homeowner’s monthly payments reflect the amount to be paid up until 78% of the mortgage will be paid for—not a longer period. Even though the homeowner can request that the policy be cancelled earlier, the insurer isn’t required to approve cancellation before 78% of the loan is paid off. It also requires the lender to disclose certain information about your insurance policy at the time of signing—the information can vary depending on the type of mortgage.
The Homeowners Protection Act isn’t full protection, however. If your payment history isn’t good, you may not be able to cancel the insurance policy even after you reach the 78% mark. In addition, the act only covers single-family residences, multi-family dwellings, and investment properties—vacation homes and some types of commercial properties aren’t covered.
Buying a house is a big investment—and nowadays, home costs are higher than ever before. Most people can’t afford to put down a 20% deposit on a home, and private mortgage insurance essentially keeps the American housing market going. In general, however, the more money you can put down up front, the more you save.