Q:

What is mortgage insurance?

A:

Quick Answer

Mortgage insurance is a coverage product home buyers purchase to protect the risks of a lender issuing a loan with a low down payment requirement. In a conventional mortgage, the home buyer is required to pay for private mortgage insurance when the initial down payment is less than 20 percent of the purchase price.

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Full Answer

Lenders require mortgage insurance with high-risk loans. The insurance company pays off the mortgage if the homeowner is unable to make payments. The government-backed FHA loan program also has mortgage insurance requirements. FHA lenders offer loans with down payment requirements as low as 3.5 percent of the purchase price. When home buyers do not have as much money to put into the home, the lender is less certain about their potential for repayment.

Mortgage insurance is typically paid in monthly installments as part of the homeowner's mortgage payment. As of 2013, on private mortgage insurance, premiums range from 0.3 percent to 1.15 percent of the original purchase price. However, the premiums depend on the down payment percentage and are subject to change. For FHA insurance, home buyers pay an upfront premium of 1.75 percent of the original purchase price of the property. In addition, homeowners pay ongoing annual premiums, which also fluctuate depending on the original loan amount.

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