What are the two most common types of mortgage insurance?

Mortgage protection insurance is a financial product that protects lenders in case borrowers default on their mortgage loans. When someone buys a home and makes a down payment of less than 20% of the purchase price, lenders often require them to get mortgage cover insurance to mitigate the increased risk of loaning a larger percentage of the property’s value.

The two different types of mortgage insurance available are:

· Private Mortgage Insurance (PMI): Private Mortgage Insurance (PMI) is provided by private insurance companies. It is the most common type of mortgage insurance and is typically required for conventional loans, which are loans not insured or guaranteed by the government (e.g., FHA or VA loans). PMI premiums are usually included in the monthly mortgage payment or paid as a lump sum upfront. Once the borrower’s equity in the home reaches 20% (based on the original appraisal or the property’s current value), they can request to cancel PMI payments.

· Mortgage Insurance Premium (MIP): Mortgage Insurance Premium (MIP) is specific to Federal Housing Administration (FHA) loans, which are government-backed loans designed to help borrowers with lower down payments and credit scores qualify for mortgages. MIP serves a similar purpose to PMI, protecting the lender in case of default. However, MIP has different rules regarding cancellation. For FHA loans with a down payment of less than 10%, the MIP must be paid for the life of the loan. For FHA loans with a down payment of 10% or more, MIP payments can be cancelled after 11 years.

It is essential for potential homebuyers to understand the implications of mortgage insurance on their monthly mortgage payments and overall loan costs. Each type of mortgage insurance has different requirements and costs, so borrowers should carefully review their options and consider how it fits into their financial plans. Some insurance companies also offer specific policies under Islamic law called Takaful insurance, which also covers mortgage protection and other such events.