Mortgage insurance is designed to lower the risk for a lender of making a loan to you. Mortgage insurance largely facilitates the possibility of borrowers getting a mortgage when they have less than a 20% down payment. It helps to protect the lender against losses attendant to default of a mortgage.
When you get any loan with a down payment of less 20%, you will typically pay some form of mortgage insurance. Depending on the type of loan you get, your mortgage insurance premiums will be structured in different ways and referred to by different names. Below is a quick overview.
With conventional loans, the mortgage insurance will be provided by a private company and is therefore referred to as private mortgage insurance, or "PMI". If you are required to pay PMI on a conventional loan, the premiums are typically part of your monthly payment. You are generally required to pay those premiums until your loan balance reaches 78% of the purchase price.
Federal Housing Administration (FHA)
With an FHA loan, your mortgage insurance premiums, or "MIP", are paid directly to FHA. MIP is required on all FHA loans. There is an upfront premium ("UFMIP") which is typically included in your closing costs, and can be rolled into your mortgage. There is also a monthly premium included as part of your monthly payment. Usually, this monthly premium remains a part of your payment for the life of your loan.
Veterans’ Affairs (VA)
Instead of typical mortgage insurance, the VA guarantee acts as a risk protection mechanism on VA loans. There is no monthly cost associated with your monthly payment. Instead, there is an upfront "VA Funding Fee" due at closing, which can be rolled into your mortgage. This funding fee will vary based on factors like the purpose of your loan, whether or not you’ve had a previous VA loan, your type of military service, your disability status, and the amount of your down payment.
US Department of Agriculture ("USDA" or "Rural Housing")
The insurance premium associated with USDA loans is typically referred to as the "Guarantee Fee". You’ll pay the guarantee fee both upfront, which can be rolled into your mortgage; and as part of your monthly payment.
Most commonly, your monthly payment has four main components:
Frequently you’ll hear people refer to the first initial of the items above when describing a mortgage payment. For example, "P&I" refers to just the principal and interest portion of your payment. "PITI" refers to all 4 components together. Our payment calculator can help you get an idea of what your payment might look like.