What Is Mortgage Insurance?

Mortgage insurance is a type of policy that protects a mortgage lender if a borrower fails to make their payments. While mortgage insurance is designed to protect the lender, this reduced risk allows lenders to offer loans to borrowers who otherwise wouldn’t qualify for a mortgage at all, let alone an affordable one.

Lenders traditionally require a down payment of 20% as a condition of qualifying for a mortgage since a borrower who invests their own money in their home is less likely to give up on making payments and let the bank foreclose on the home

if their home’s value drops or their personal finances deteriorate. Both of these scenarios were seen during the 2007 housing crisis and recession, which highlighted the importance of mortgage insurance.

Note that conventional loan borrowers with lower down payments pay private mortgage insurance (PMI) while borrowers who get a loan backed by the Federal Housing Administration (FHA) pay a mortgage insurance premium (MIP).

Mortgage insurance is calculated as a percentage of your home loan. The lower your credit score and the smaller your down payment, the higher the lender’s risk, and the more expensive your insurance premiums will be

How Much Is Mortgage Insurance?

But as your principal balance falls, your mortgage insurance costs will go down, too.

For borrower-paid monthly private mortgage insurance, annual premiums from MGIC, one of the country’s largest mortgage insurance providers, range from 0.17% to 1.86% of the loan amount,

or $170 to $1,860 for every $100,000 borrowed, on a fixed-rate 30-year loan. That’s $35 to $372 per month on a $250,000 loan. Some PMI policies, called “declining renewal,” allow your premiums to decrease each year when your equity increases enough to put you in a lower rate bracket. Other PMI policies, called “constant renewal,” are based on your original loan amount and don’t change for the first 10 years.