The Definition of Mortgage Insurance

by Travis Ames, Demand Media

    When you and your partner have made the decision to purchase a home, you may find yourself suddenly looking at a fee for mortgage insurance tacked onto the rest your loan fee. While there is no need to panic, it is important to understand what mortgage insurance does, how and why your lender may need it and what this will do to your loan.

    Mortgage Insurance Basics

    At its most basic definition, mortgage insurance is purchased by lenders to protect themselves from a risky investment. If you have put less than 20 percent as a down payment on your home, the lender will likely want mortgage insurance. A bad credit score can also be a reason for a lender to take out mortgage insurance.

    There are two types of mortgage insurance. The public option that is provided by the Federal Housing Administration and the Veterans Administration. The second is a private option. Their rules and regulations vary.

    Public Insurance

    Public mortgage insurance is provided by the FHA or, on occasion, by the VA. The FHA will get involved with a lender when buyers cannot pay the full 20 percent down payment. If you, the buyer, have to take up public mortgage insurance with the FHA, your lender will require you pay the 1.5 percent premium at the time of closing. You will then pay up to 6 percent of your mortgage cost as a premium for the insurance, until you have paid more than 20 percent of your mortgage. Once the 20 percent mark has been reached, the public insurance will be paid off, and you will pay only your mortgage costs from that point on.

    Private Insurance

    Like its public version, private mortgage insurance helps the lender if the buyer does not come through with the mortgage. If a buyer puts down less than 20 percent, tthe mortgage company will require insurance. While this is similar to how public insurance works, from here on out, things work slightly differently. The mortgage insurance rate can be anywhere from 1.5 to 6 percent. These numbers are based upon several factors, including the buyers’ credit score, the amount of the loan and whether it is a fixed or variable rate.

    The Two Types of Private Insurance

    The two types of private insurance are borrower paid private mortgage insurance, or BPMI, and the lender paid mortgage insurance, or LPMI.

    BPMI is the normal type of private insurance that is purchased when a home buyer cannot place a down payment of 20 percent. The insurance is canceled after the buyer has paid off 20 percent of the loan. It may be canceled earlier if the home has been reappraised.

    Lender paid mortgage insurance is similar to a BPMI, except that the lender is paying for the insurance. Usually, the cost of the insurance is put into the monthly interest costs.

    Resources

    About the Author

    Travis Ames has written for numerous publications since 2007 and has been writing instructional articles online since 2010. His areas of expertise are wide and include travel, politics, arts and entertainment, technology and finance. He currently lives in Portland, Oregon where he will begin teaching in the fall of 2011.