What is Mortgage Insurance?

Mortgage insurance is an insurance policy that protects the mortgage lender and is paid for by the borrower of the loan. You might be wondering: what does mortgage insurance cover? Usually, when you purchase an insurance plan, it is to provide coverage for you. Mortgage insurance, however, provides coverage for your lender.

In general, you need to pay for mortgage insurance if you put down less than 20 percent on a home purchase. How much you’ll pay depends on the type of loan you have, down payment and credit.

While mortgage insurance is a benefit to the lender, it is also a benefit for the borrower because it allows you to get a mortgage with a lower down payment. Putting down 20 percent can be challenging, especially with home values on the rise, so by paying for mortgage insurance, you can still get a mortgage without needing a large down payment.

Private mortgage insurance (PMI)

PMI, or private mortgage insurance, is typically required if you’re obtaining a conventional loan with less than 20 percent down. This can include a 3% or 5% conventional loan or other type of low-down payment mortgage. Most borrowers pay PMI with their monthly mortgage payment. The cost can vary based on your credit score, loan-to-value (LTV) ratio and other factors.

Mortgage insurance premium (MIP)

MIP is the mortgage insurance premium required for an FHA loan with less than 20 percent down. You’ll pay for this mortgage insurance upfront at closing, and also annually. The upfront MIP equals 1.75 percent of your mortgage, while the annual MIP ranges from 0.45 percent to 1.05 percent of your mortgage based on the amount you borrowed, LTV ratio and the length of the loan term.