Why Is Mortgage Insurance Required?
You may have heard about mortgage insurance. But did you know that it can add up to $100 or more per month to your monthly bill? You can opt out of mortgage insurance or cancel it. In any case, you should know that it is required by law for most conventional loans. Here are some tips to understand why mortgage insurance is required. This type of insurance protects the lender against any financial losses when you don’t pay your mortgage on time.
Mortgage insurance protects the lender from financial losses
Mortgage insurance is an important aspect of home financing. It protects the lender from financial losses should the borrower default on their loan. It protects the lender by paying for a predetermined amount of the mortgage upfront or as a monthly premium. Although some borrowers are forced to purchase PMI, this can be waived after they pay 20% of the principal amount. Whether or not mortgage insurance is worth it depends on your needs and circumstances.
Mortgage insurance is usually sold by a private mortgage insurance company. This is different from government guarantees, and the borrower pays the premium for the insurance, which is a percentage of the total loan. Private mortgage insurance also allows borrowers to make lower down payments. Without PMI, lenders generally require a 20% down payment. Using PMI protects the lender up to the first 20% of the loan. Usually, defaults occur in the first few years, which makes it possible for borrowers to get a loan with a higher risk.
It is required on conventional loans
Conventional loans require a minimum credit score of 620. A lender wants to ensure that borrowers are financially disciplined and sound money managers, so a slightly lower credit score will pass the test, but lenders will charge a higher interest rate to compensate for the extra risk. For those with lower credit scores, an FHA loan may be a better choice. This loan isn’t subject to mortgage insurance requirements, so it is possible to qualify even with a lower score.
However, some lenders still require PMI on conventional loans. You can opt out of PMI, if you pay it up front. However, most lenders require PMI for the entire term of the loan, so make sure you read the fine print carefully. PMI is a requirement for conventional loans with down payments of less than 20%. However, if you aren’t able to afford the payment, you can opt to opt for a low-down-payment, PMI-free loan from Quicken Loans. The downside of this loan is that you will have to pay a higher interest rate, but the mortgage is a low-risk one.