What Is Financed Mortgage Insurance?

Financed mortgage insurance represents a method of paying for a required insurance policy that protects a mortgage lender. Instead of paying the mortgage insurance premium out-of-pocket at the time of closing, the cost is incorporated directly into the total amount borrowed for the home. This approach allows borrowers to reduce their upfront cash requirements, making homeownership more accessible for some individuals.

Understanding Mortgage Insurance

Mortgage insurance is a policy designed to protect the lender, not the borrower, from financial loss if a borrower defaults on their loan. Lenders typically require this insurance when a homebuyer makes a down payment of less than 20% of the home’s purchase price. This requirement mitigates the increased risk lenders undertake with lower down payments. The primary purpose of mortgage insurance is to enable individuals to qualify for a home loan they might not otherwise obtain due to a smaller down payment. It is commonly associated with conventional loans as Private Mortgage Insurance (PMI) and with government-backed loans, such as those from the Federal Housing Administration (FHA), as Mortgage Insurance Premium (MIP).

What is Financed Mortgage Insurance?

Financed mortgage insurance involves adding the total premium amount for the insurance directly to the principal balance of the mortgage loan. Instead, this premium becomes part of the larger loan amount, which is then repaid over the entire loan term. The mechanics involve the lender increasing the initial mortgage amount by the cost of the insurance premium. For instance, if a home costs $300,000 and the financed mortgage insurance is $5,000, the borrower’s loan amount becomes $305,000.

This method differs from traditional monthly mortgage insurance payments, where the premium is added to the regular monthly mortgage bill, or from paying the entire premium as a lump sum out-of-pocket at closing. It allows borrowers to avoid a significant upfront expense, integrating the insurance cost into the long-term financing of the home.

How Financed Mortgage Insurance Affects Your Loan

When mortgage insurance is financed, it directly increases the initial principal balance of the home loan. This larger principal amount means the borrower will pay interest on the financed insurance premium over the entire life of the mortgage. The increased loan principal also translates to slightly higher monthly mortgage payments. This is because the monthly payment calculation includes both the principal and interest on the entire borrowed amount, including the financed insurance.

Although financing the premium reduces immediate out-of-pocket expenses at closing, it generally results in a greater total cost over the loan’s term compared to paying the premium upfront or through monthly installments not subject to interest over the full term. This method can also slow down the rate at which a borrower builds equity in their home, as a portion of payments goes towards servicing the financed insurance.

Types of Loans with Financed Mortgage Insurance

Financed mortgage insurance is commonly encountered in specific loan programs, particularly those designed for borrowers with lower down payments. For Federal Housing Administration (FHA) loans, an Upfront Mortgage Insurance Premium (UFMIP) is required, which is typically 1.75% of the loan amount as of 2025. This UFMIP is usually financed directly into the loan amount. FHA loans also have annual mortgage insurance premiums, but the upfront portion is the one typically financed.

For conventional loans, borrowers making a down payment of less than 20% often require Private Mortgage Insurance (PMI). While PMI is most commonly paid through monthly installments, some conventional loan scenarios allow for a single premium PMI to be financed into the loan. This “single-premium” option means the borrower pays the entire PMI cost in one lump sum, which can be paid at closing or, in some cases, rolled into the mortgage itself. This contrasts with the typical monthly PMI payments seen in many conventional loans.