Mortgage insurance is a type of insurance that protects lenders in the event that a borrower defaults on their mortgage payments. When a borrower puts down less than 20% of the purchase price of a home, most lenders require mortgage insurance to mitigate their risk.
There are two main types of mortgage insurance:
1. Private Mortgage Insurance (PMI): This is the most common type of mortgage insurance, and it is required for most conventional loans. PMI is typically paid as a monthly premium that is added to the borrower's mortgage payment. The cost of PMI varies depending on the size of the down payment, the loan amount, and the borrower's credit score.
2. Mortgage Insurance Premium (MIP): This is a type of mortgage insurance that is required for most FHA loans. MIP is paid as an upfront fee at the time of closing, as well as a monthly premium that is added to the borrower's mortgage payment. The cost of MIP varies depending on the size of the down payment, the loan amount, and the term of the loan.
Mortgage insurance is designed to protect lenders, but it can also benefit borrowers by allowing them to qualify for a mortgage with a lower down payment. However, borrowers should be aware that mortgage insurance can add to the cost of their monthly mortgage payments, and they should factor this into their budget when deciding how much home they can afford.
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