Are you considering a USDA loan to purchase or refinance your home? If so, then it’s important to understand the role insurance plays in these types of loans. Mortgage insurance is an added expense that can add up quickly if not managed properly. Knowing what is required and how much it will cost can help you make an informed decision when deciding on a loan program. In this article, we’ll explain everything you need to know about mortgage insurance and USDA loans so that you can make the best choice for your situation.

Mortgage insurance is coverage for a lender in the event that you default on your loan. With USDA loans, there are two types of insurance that must be paid: upfront and annual insurance premiums. The upfront insurance premium is typically 1% of the loan amount and is usually rolled into the loan itself. Annual insurance premiums are collected each year as part of your monthly mortgage payment and are determined by your credit score and loan-to-value ratio (LTV).

USDA loans also require private mortgage insurance (PMI) if the LTV ratio exceeds 80%. PMI is an added expense that can add up quickly; however, it can be cancelled after certain milestones have been met such as when you’ve made enough payments that your loan-to-value ratio is under 80%.

It’s important to understand that insurance costs can add up quickly and should be factored into your budget when considering a USDA loan. Knowing what insurance is required, how much it will cost, and whether or not you can cancel it are all important considerations when deciding on a loan program. By understanding insurance requirements and how they affect the bottom line of your loan, you can make an informed decision about which mortgage product is right for you.