If you are buying a house with a FHA mortgage or with a conventional mortgage with less than 20% down, you will probably have some form of mortgage insurance. This is an additional monthly charge on top of your normal payment to buy insurance on your mortgage. The insurance is not for you, though, it is for the mortgage company that is loaning you the money. They are, in effect, taking out an insurance policy so that if you default on the loan, they will be compensated by the insurance company. And instead of impacting your mortgage, they simply pass those costs on to you.

No matter what type of loan you had in the past, your mortgage insurance would eventually go away. Once you hit 5 years and 20% equity in your house, you could have your mortgage insurance dropped. But with new regulatory changes, that is not necessarily true anymore. The means you need to be careful with your decision in which loan you go with, as the costs of mortgage insurance can add up over 15, 20, or 30 years based upon the loan term you sign up for.

If you apply for a conventional mortgage, you will still likely be able to drop the mortgage insurance. But if you apply for a FHA loan, it may not be so easy. The way the mortgage insurance on FHA loans works now is that it stays for the life of the loan. So while you can buy a house with as little as 3.5% down, you may be costing yourself tens of thousands of dollars in insurance costs.

For these reasons, it is important to work with a highly qualified mortgage banker who can thoroughly explain the ins and outs of the mortgage you sign up for.

If you have any questions about the mortgage you are considering, or if you would like to get a preapproval letter, please contact me. If you have anything to add about how mortgage insurance works, please leave a comment.