Definition:
Mortgage insurance (MI) is a policy that protects the lender in case the borrower defaults on the loan. It’s typically required when a homebuyer puts down less than 20% of the home’s purchase price.
Example:
Emma buys a $300,000 home with a 5% down payment. Because her down payment is under 20%, her lender requires her to pay monthly mortgage insurance. This protects the lender in case Emma stops making payments on the loan.
Explanation:
Mortgage insurance makes it possible for buyers to purchase a home with a smaller down payment by reducing the lender’s risk. There are two main types:
- Private Mortgage Insurance (PMI) – for conventional loans
- Mortgage Insurance Premium (MIP) – for FHA loans
For conventional loans, PMI is usually added to the monthly mortgage payment but can sometimes be paid upfront or split between the two. Once the borrower’s equity in the home reaches 20%, PMI may be removed (subject to lender approval).
For FHA loans, MIP is typically required for the life of the loan, unless the borrower puts down 10% or more and makes payments for 11 years.
The cost of MI depends on factors like the loan amount, credit score, and down payment size. It’s not the same as homeowners insurance, which protects the home itself.
Why is Mortgage Insurance (MI) Important in Real Estate Transactions?
Mortgage insurance is important because it allows more people to become homeowners without needing a large down payment. For buyers, it provides access to financing options that would otherwise be unavailable. For sellers, it expands the pool of qualified buyers. Understanding MI helps buyers plan their monthly budget and long-term costs when purchasing a home.