Before you buy a home, knowing the true costs for homeownership can help you prepare for the ongoing expenses you could have related to homeownership. Last month, we covered ongoing maintenance. That included the maintenance you can expect to do on your home and how much to budget for those costs, repairs, and replacements. This month, we’re looking at mortgage insurance.

Mortgage insurance is an insurance policy that protects a lender against financial loss if the borrower defaults on payments or cannot meet their mortgage obligations. Mortgage insurance is common and differs from homeowners insurance, which is required to pay for losses and damage to your property.

Mortgage insurance helps lower the lender’s risk of making a loan to you, but it also could allow you to purchase a home you might not be able to get otherwise. If you are required to obtain mortgage insurance, the cost may be included in the total monthly payment that you make to your lender, your costs at closing, or both.

The type of mortgage insurance you will need depends on the type of loan. Below is some general information on mortgage insurance by loan type:

• Conventional Loan: Private mortgage insurance (PMI) is required if you put less than 20 percent down. Your lender will arrange the PMI and a private insurance company will issue the policy. PMI may be included in your total monthly payment, paid up front as a lump sum at closing, or a combination of both.
• Federal Housing Administration (FHA) Loan: FHA mortgage insurance, known as mortgage insurance premium (MIP), is required for all FHA loans regardless of your down payment amount. You will pay a monthly payment to FHA, as well as an upfront fee which you may be able to roll into your mortgage rather than paying it out of pocket at closing.
• U.S. Department of Agriculture (USDA) Loan: A USDA loan program is similar to an FHA loan. You pay for the insurance both at closing and as part of your total monthly payment. You may be able to roll the upfront portion of the insurance premium into your mortgage instead of paying it out of pocket at closing.
• Department of Veterans’ Affairs (VA) loan: With a Department of Veterans’ Affairs backed loan, the VA guarantee replaces mortgage insurance. There is no monthly mortgage insurance premium, however, you pay an upfront “funding fee.” The amount of that fee varies based on certain factors. You may be able to roll the upfront fee into your mortgage instead of paying it out of pocket at closing.

Depending on the loan type, you may be eligible to cancel mortgage insurance once you have paid down your mortgage to a specified point.

Taking a CHFA-sponsored homebuyer education class is a good way to get more information about mortgage insurance. Register for a homebuyer education class today! 

Missed any part of the True Costs of Homeownership Series? Check out the issues of Your Road Home from January – March of this year.

April is Financial Literacy Month and a great opportunity to take advantage of CHFA’s free financial education app, Zogo. Learn while you earn gift cards to various retailers—topics include budgeting, saving, credit, homebuying, risk management, and more. Use the app to better understand your finances and how they relate to reaching your homeownership goal through short lessons and quick quizzes in English and Spanish. 

Start Learning and Earning Today

1. Download Zogo at chfainfo.com/zogo 
2. Use access code: ROADHOME

Your privacy matters: CHFA and Zogo never share your information.

Colorado Housing and Finance Authority

www.chfainfo.com

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