The Types of Home Mortgage Insurance

Lenders talk about home mortgage insurance with potential home buyers. First-time home buyers may have never heard of home mortgage insurance. Seasoned home buyers may have never asked about home mortgage insurance or why they need it. Understanding the purpose of home mortgage insurance and the types of insurance available can help borrowers make informed decisions before closing on their homes.

   
Private Home Mortgage

Private mortgage insurance, or PMI, is required on a mortgage if the down payment is less than 20 percent of the appraised value of the home. The borrower pays the premiums, while the lender is named as the beneficiary of the policy. This protects the lender in case the borrower defaults on the loan. The insurance company guarantees that the lender will be paid in full. Once the borrower's equity reaches a certain level of the home value, PMI is no longer required. Some lenders will waive PMI in exchange for a higher interest rate on the mortgage.
   
Veterans Affairs Mortgage Insurance

The U.S. Department of Veterans Affairs (VA) offers mortgage insurance to a select group of home buyers. It is offered as a benefit to eligible veterans or reservists who do not have 20 percent of the home value to use as a down payment. The VA guarantees up to a maximum amount based on location and service record of the applying veteran. Eligible veterans will need to bring a certificate of eligibility to their lender, which they can receive from the VA.
   
FHA Mortgage Insurance

The U.S. Federal Housing Administration (FHA) offers mortgage insurance on FHA loans. This insurance is required for borrowers with a down payment of less than 20 percent and protects the lender from borrower default. The mortgage insurance costs 0.5 percent per year of the total loan amount. FHA also charges an additional 1.5 percent upfront premium. The mortgage insurance payments end when the loan-to-value ratio reaches 78 percent if the mortgage term is 15 years or less. If the mortgage term is greater than 15 years, the loan-to-value must reach 78 percent and the borrower must have made five years of insurance premiums before the insurance payments will end.