Mortgage insurance (MI) is required when the down payment on a home is less than 20%, and it is designed to protect the lender in the event of loan default. The type of mortgage insurance required will depend on the type of mortgage you have.
If you have a conventional loan, you will be paying private mortgage insurance (PMI). The cost of PMI will vary on a number of things, such as the size of your down payment and your credit score. A general estimate is for every $100,000 borrowed, you can expect to pay $30-$70 per month. PMI can be paid monthly along with your mortgage payment or can be financed as part of the loan.
Private mortgage insurance can be cancelled when you have at least 20% equity in your home. If you don’t request a PMI cancellation, your lender will terminate the PMI on the date your principal balance is scheduled to reach 78% of the original value of your home.
If you have an FHA loan, your mortgage insurance premiums are paid to the Federal Housing Administration (FHA). FHA mortgage insurance includes both an upfront and monthly payment. The upfront payment can be financed into the mortgage instead of paying out of pocket. Earlier this year, the FHA announced that they have lowered the annual insurance premiums from 1.35% to 0.85%, which could save the average borrower about $80 per month.