Q: Do I have mortgage insurance?
A: Many people find the numerous types of insurance associated with buying a home confusing. All homeowners should have title insurance and homeowners insurance that covers their property. In addition, mortgage insurance is required by some lenders, depending on the details of the loan, as a guarantee that at least part of the mortgage loan will be repaid if the homeowner defaults on the loan.
Mortgage insurance does not make payments for you nor pay you in any way if you cannot make payments on the loan. "Credit insurance" or "credit life insurance" may or may not be offered by your mortgage lender or other party for these purposes.
Mortgage insurance and conventional loans
Conventional lenders require mortgage insurance to be paid when a borrower finances a home purchase with a down payment of less than 20 percent of the home value. If you purchased your home with a lower down payment, you are likely to be paying mortgage insurance. Some homeowners find they need to pay mortgage insurance when they refinance, as well, if they have less than 20 percent equity in their property.
Paying for mortgage insurance
While borrowers who pay mortgage insurance as part of their monthly mortgage payment can easily check their mortgage statement to find out how much they are paying, some homeowners opt to pay for mortgage insurance in other ways. Some homeowners opt to pay the first-year premium for mortgage insurance at their closing, with a renewal premium collected monthly. Another option is to pay one month of mortgage insurance at the closing, followed by larger monthly premiums.
Lender-paid mortgage insurance is another option, in which the borrower pays a slightly higher interest rate over the course of the loan and the mortgage lender pays the private mortgage insurance company from the additional revenue generated by the higher rate.
Mortgage insurance and FHA loans
All homeowners who finance their home with an FHA-insured mortgage loan pay mortgage insurance, as this is a requirement for these loans for all borrowers. FHA loan requirements include both an upfront mortgage insurance payment and an annual mortgage insurance premium that is paid monthly with the borrowers' payments for their mortgage principal and interest.
The quickest way to find out if you are paying mortgage insurance is to check with your mortgage lender.
Michele Lerner contributed to this answer.
A 25-year expert observer of the mortgage and consumer debt markets, Keith Gumbinger has been cited in thousands of articles covering a wide range of consumer finance and economic topics in outlets ranging from the Wall Street Journal to the Bottom Line newsletters. He has been a featured guest on national broadcasts for CNN, CNBC, ABC, CBS and NBC television networks and has been heard on NPR and other national and local radio programs. Keith is the primary researcher and writer for HSH.com's MarketTrends newsletter and has authored or co-authored a number of consumer guides on mortgages, home equity, refinancing and more.