What Is up-Front Mortgage Insurance?

Up-front mortgage insurance is a type of insurance that must be paid at the time a mortgage loan is finalized. In general, up-front mortgage insurance is only required by certain government loan programs, such as Federal Housing Administration (FHA) loans. While there may be many benefits to using a loan that requires this type of mortgage insurance, there are also potentially negative factors that must be considered.

The key distinguishing point in up-front mortgage insurance is that the bulk of the premium is due when the loan is granted. Some loan packages may reserve a small portion of the premium to be paid on a monthly basis, added to regular mortgage payments, but the vast majority of the amount will be due at the time of signing. By contrast, most private mortgage insurance plans spread the cost of the premium out over the life of the mortgage or a set period of time, requiring higher monthly payments.

Getting up-front mortgage insurance is usually a requirement of taking out an FHA loan. This type of loan may be easier to obtain for some buyers, as the credit score and income restrictions are more lenient than many private mortgage loans. In general, since these loans are available to a broader base of people, the risk of default is considerably higher for the lender. Using an up-front mortgage insurance payment plan allows the government to shore up funding for the FHA program and to refund lenders that have lost out due to the increased risk of default.

An important benefit to up-front mortgage insurance is that it may be canceled or refunded under certain circumstances. If a buyer chooses to sell his or her home within five years of buying it, a portion of the up-front insurance premium may be refunded. For buyers who stay in their homes, monthly premiums on the balance of the policy may be canceled once they owned the property for five years, or once their equity in the home has reached a certain level. Insurance cancellation usually occurs once it is clear that the owner is at a low risk of default, so it may also require a record of on-time payments and a decent credit score.

The major downside to up-front mortgage insurance is that it can significantly increase closing costs on a home. This may be problematic for buyers without a lot of extra cash or credit on hand, since most of their available money may already be going to cover the down payment. Using private mortgage insurance may be preferable for buyers who make an adequate monthly income, but do not have enough savings to cover both regular closing costs plus the concentrated cost of the up-front premium.