Mortgage default insurance is an insurance policy that protects the lender if the borrower is unable to continue making payments.
FHA loans and mortgage insurance
To compensate for a lower required credit score, FHA loans will generally include mortgage insurance as part of the borrower’s liability.
FHA loans require two types of mortgage insurance payments:
- An advance mortgage loan insurance premium (MIP) 1.75% of the loan amount, either paid at the closing of the loan, or integrated into the loan amount.
- A monthly PIM as part of your regular mortgage payments.
If your down payment was less than 10%, you will continue to pay monthly mortgage insurance for the duration of the loan.
If your down payment was 10% or more, you’ll only need to pay mortgage insurance for the first 11 years of the loan before you can withdraw it.
Conventional loans and mortgage insurance
Private Mortgage Insurance (PMI) is a type of mortgage insurance unique to conventional loans. Like mortgage insurance premiums do with FHA loans, PMI protects the lender if the borrower does not pay off the loan.
You will have to pay the PMI as part of your mortgage payment if your down payment is less than 20% of the value of the home. However, you can apply for PMI removal when you have 20% equity in the house. Once you’ve reached 22% home equity, the PMI is often automatically removed from your mortgage payment.
Unlike mortgage insurance for FHA loans, PMI offers different payment options. The Borrower Paid PMI, or BPMI, does not require an upfront cost. Depending on the lender, you can ask for it to be canceled once you have reached 20% of the equity in your home. In most cases, it is automatically deleted once you reach 22% equity.
The PMI paid by the lender, or LPMI, is paid for you by your lender. The lender will increase your mortgage interest rate to incorporate the insurance payment they make on your behalf. This option may result in lower payments, but it is usually not cheaper over the life of the loan. The LPMI cannot be canceled because it is embedded in your interest rate.