Understanding Mortgage Insurance

When buying a home, especially with a smaller down payment, mortgage insurance is often part of the equation. While it may seem like just another cost, understanding how it works, and the different types available, can help you make smarter financial decisions on your homeownership journey.

What is Mortgage Insurance

Mortgage insurance is a policy that protects lenders in case a borrower is unable to make their mortgage payments. It’s typically required when a borrower puts down less than 20% of a home’s purchase price. Though it benefits the lender, mortgage insurance is paid by the borrower. It’s important to understand how it works and how it impacts your monthly mortgage loan payments.

Types of Mortgage Insurance

There are two types of mortgage insurance— Private Mortgage Insurance (PMI) and Mortgage Insurance Premium (MIP).

PMI is traditionally for conventional loans not backed by the government. This cost is often paid monthly, but can also be paid as a one-time fee. It covers insurance in the case that borrowers stop paying their mortgage. PMI can be removed once you’ve built 20% equity in your home through payments or property value increases.

MIPs apply to government-backed FHA loans. This cost must be paid regardless of the down payment amount. It consists of a one-time upfront fee of 1.75% of the loan amount and ongoing monthly premiums to the mortgage payment. MIPs are often required for the life of the loan, unless you refinance into a conventional loan later on.

Which is Best?

PMI is usually ideal for buyers with strong credit who can eventually eliminate the extra cost by reaching 20% equity. MIP is more common for buyers with lower credit scores or smaller down payments, offering more flexible qualification but with longer-term insurance costs.

Learn How Coastal Custom Mortgage Can Help

Whether you’re buying your first home or refinancing, Coastal Custom Mortgage is here to help you navigate the complexities of mortgage insurance, find a mortgage loan program, and determine the right solution for your needs. Contact us today to learn how we can support your journey to homeownership with confidence.