What is mortgage insurance?
The traditional target for a home down payment is 20% of the purchase price, but that’s out of reach for many buyers.
Mortgage insurance makes it possible to hand over a much smaller down payment and still qualify for a home loan. It protects the lender in case you default on the loan.
With a conventional mortgage — a home loan that isn’t federally guaranteed or insured — a lender will require you to pay for private mortgage insurance, or PMI, if you put less than 20% down.
With an FHA mortgage, backed by the U.S. Federal Housing Administration, you’ll pay for mortgage insurance regardless of the down payment amount.
USDA mortgages, backed by the U.S. Department of Agriculture, and VA mortgages, backed by the U.S. Department of Veterans Affairs, don’t require mortgage insurance. But they do have fees to protect lenders in case borrowers default. So you’ll still face an extra cost with these home loans in exchange for the low down payment requirement.
You bear the cost of mortgage insurance, but it covers the lender. Mortgage insurance pays the lender a portion of the principal in the event you stop making mortgage payments. Meanwhile, you’re still on the hook for the loan if you can’t pay, and you could lose the home in foreclosure if you fall too far behind.
This is different from mortgage life insurance, which pays off the remaining mortgage if the borrower dies, or mortgage disability insurance, which eliminates the mortgage if the borrower becomes disabled.