How Much Is Mortgage Insurance?

How Much is Mortgage Insurance

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  • Typical Range: 0.5 percent to 2 percent of the total loan amount
  • National Average: 1.25 percent of the total loan amount

Calculating monthly mortgage payments is an important step in the home-buying journey. Knowing how much will be spent each month on housing costs can help buyers set a budget and find a house they can afford. Many home buyers focus on principal and interest when breaking down mortgage payments, but those aren’t the only costs that go into a mortgage. Property taxes, homeowners insurance, and other fees are typically baked into the monthly payment, so it’s advised to account for those expenses as well.

One potential cost that’s easy to overlook is mortgage insurance, which is entirely separate coverage from homeowners insurance. What is mortgage insurance? Rather than protecting the homeowner’s interests and assets, private mortgage insurance—or the PMI meaning—protects the lender in the event of nonpayment or default. Mortgage companies will typically attach mortgage insurance to a home loan when the borrower puts forward less than 20 percent of the purchase price as a down payment. In most situations, mortgage insurance premiums will be added to the monthly payment until the borrower has accumulated 20 percent equity in the property and the lender agrees to remove the PMI requirement.

Mortgage insurance is not limited to conventional home loans. Loans insured by the Federal Housing Administration (FHA) also come with their own variety of mortgage insurance that is required with every FHA loan. Unlike PMI, this type of mortgage insurance can never be removed from an FHA loan, no matter how much equity the borrower has. The only recourse is to refinance the mortgage into another type of loan after accumulating sufficient equity.

How much is mortgage insurance over the life of the loan? Lenders calculate private mortgage insurance as a percentage of the total loan amount. Annual premiums will typically be spread out evenly across the borrower’s monthly mortgage payments, but that is not always the case.

Mortgage insurance rates can range from 0.5 percent to 2 percent, with the national average standing at 1.25 percent. How mortgage companies arrive at that percentage—as well as other factors that influence mortgage insurance cost—can vary from lender to lender.

How Much is Mortgage Insurance

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Factors in Calculating Mortgage Insurance

“How much is PMI?” may seem like a simple question, but the answer is actually quite complicated. While the national average for PMI is 1.25 percent, buyers shouldn’t expect a flat rate on their mortgage insurance. PMI costs can vary significantly from borrower to borrower, depending on the size of the home loan, the amount of home equity, and the borrower’s debt history and current financial situation, among other potential factors.

Loan Size and Term

Lenders calculate mortgage insurance as a percentage of the loan amount, making loan size one of the most important factors affecting PMI. The higher the loan amount, the more PMI will cost. For instance, a homeowner with a $300,000 home loan and a 1.25 percent PMI rate would owe $3,750 each year in mortgage insurance.

Down Payment Size

With a conventional mortgage, the size of the down payment influences not only whether the borrower will owe PMI but also how expensive the premiums will be. Lenders are more likely to give favorable lending terms to borrowers who can get close to 20 percent equity with a down payment. Even if home buyers can only afford to put down 15 percent of the purchase price on a new home, lenders may view them as less risky than a borrower with otherwise comparable qualifications who only makes a 10 percent down payment. As such, borrowers may be granted a lower interest rate on mortgage insurance if they put down more money at closing, which will also lead to smaller monthly mortgage installments.

Loan-to-Value Ratio

Loan-to-value (LTV) ratio is an important concept in the mortgage industry, especially in regard to risk management. LTV compares the size of the loan with the assessed value of the property. Lenders use LTV ratios to determine whether the property provides enough collateral to back the loan amount. If the numbers don’t add up, the lender may insist that the buyer renegotiate the purchase price with the seller. In a worst-case scenario, the lender could deny the mortgage application entirely due to a high LTV ratio.

LTV can also be viewed as a representation of the amount of home equity a borrower has. A lower LTV ratio means new home buyers own a bigger stake in the property, which can ease concerns about their ability to repay their home loan. With that in mind, mortgage companies may reduce PMI rates in response to lower LTV ratios. Homeowners will steadily lower their LTV as they make payments on the principal, but at the outset of the loan, LTV is determined solely by the size of the down payment.

Credit Score

Credit scores serve as a reflection of a person’s financial past, credit usage, and ability to manage debt. Higher scores suggest more financial stability and a greater likelihood of repaying debt. Credit inquiries are important steps in the loan application process, involving a thorough review of the borrower’s finances and credit history. PMI insurance is, first and foremost, a risk mitigation tool for lenders. Although they may approve a borrower with a low credit score, lenders will likely attach mortgage insurance at a higher interest rate to offset the heightened risk.

Type of Loan and Type of Mortgage Insurance

When choosing the right mortgage for their circumstances, most home buyers are probably not viewing their selection from the lender’s perspective. But different loan types present different levels of risk to mortgage companies. For instance, jumbo loans will have significantly larger loan amounts and monthly mortgage payments than conforming fixed-rate loans. A lender may question whether the borrower has enough income to keep up with the payments each month, insisting on a higher PMI rate to counteract the perceived risk of nonpayment.

Mortgage insurance for FHA loans is calculated slightly differently, but it’s still based on the amount borrowed, the percentage of the total loan used as a down payment, and the term of the loan. In general, borrowers who put down less than 10 percent at closing will have a higher mortgage insurance premium, or MIP, than those who put down more than 10 percent. Additionally, MIP is lower for borrowers whose loan term is less than or equal to 15 years than it is for those whose loan term is more than 15 years.

Lenders may also take into consideration the type of mortgage insurance used. Some forms of mortgage insurance, such as single-premium and split-premium insurance, require borrowers to pay at least a portion of their insurance premiums up front. If that’s the case, mortgage companies may agree to set a lower PMI rate.

PMI Rate

As noted, mortgage insurance premiums are based on the attached interest rate, which may range anywhere from 0.5 percent to 2 percent. Rates will vary depending on the lender’s underwriting standards and processes used to assess borrowers’ financing qualifications. Applicants who present greater financial risk because of high levels of debt, low credit scores, or other factors can expect to receive higher rates on private mortgage insurance.

How Much is Mortgage Insurance

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Types of Mortgage Insurance

Mortgage insurance can be packaged in a variety of ways, changing the payment structure for borrowers—sometimes significantly so. In most cases, PMI will be spread out across every mortgage payment. That being said, home buyers may have the opportunity to cover some or all of that cost up front when the loan is funded. Lenders may even agree to pay for private mortgage insurance themselves, although this arrangement may not be exactly what it initially appears to be. The type of mortgage insurance used could affect how much a person pays over the life of a home loan.

Borrower-Paid Mortgage Insurance

In most cases, lenders will require borrowers to cover the costs of PMI as part of the terms of their mortgage agreement. Premiums will be built into the monthly mortgage payment and added on top of other expenses (such as the principal and interest) and will appear as a separate fee on the mortgage statement. The monthly PMI premiums may be lower than homeowners insurance premiums, but that will depend on the specific circumstances. Once the borrower has accumulated at least 20 percent equity in the property, the PMI can be removed from the loan, either by request from the borrower or automatically by the mortgage company once equity hits 22 percent.

Homeowners could have an opportunity to cancel their mortgage insurance early if the home appreciates in value and their LTV ratio drops to 80 percent or less. In that scenario, borrowers will first need to schedule an appraisal and then notify their lender of the home’s new appraised value. However, lenders will often require a certain amount of time to pass—it could be several years—before removing PMI in response to a reappraisal since house values can fluctuate depending on the market.

Single-Premium Mortgage Insurance

Single-premium mortgage insurance offers a completely different payment structure that could impact the total cost of this insurance. Instead of splitting the cost of PMI insurance across the life of the loan, lenders may allow borrowers to make a single lump-sum payment at the point of origination.

Borrowers could benefit from covering all PMI expenses up front and removing those charges from their monthly payments. Making an up-front payment could also convince the lender to set a lower interest rate on the remaining mortgage premiums. On the other hand, single-premium mortgage insurance requires a large initial cost that may be difficult to budget for along with the down payment, origination fees, homeowners insurance deposit, and other closing costs.

Lender-Paid Mortgage Insurance

Some lenders may offer to cover the cost of mortgage insurance with what’s known as lender-paid PMI. At first glance, this payment structure can appear very appealing to home buyers because they won’t pay an insurance premium each month. However, lender-paid mortgage insurance can be misleading, suggesting savings that may never materialize.

Rather than set a monthly premium, the lender will raise the interest rate on the mortgage itself to offset the cost of PMI. The mortgage payment will likely increase due to the higher interest rate. Although it may sound like homeowners save money with lender-paid mortgage insurance, it may not actually change how much they will pay over the life of the loan.

Split-Premium Mortgage Insurance

Homeowners may find the idea of an up-front payment appealing, but they may not want to cover the entire cost of mortgage insurance all at once. In that instance, split-premium insurance could be a viable option. Borrowers make an initial payment on their PMI premiums when the loan is funded, but that payment only covers a portion of the total mortgage insurance cost. Lenders will then spread the remainder of the PMI premiums across the monthly payments. Like single-premium mortgage insurance, a split-premium setup may encourage lenders to reduce the PMI rate due to the initial payment. This approach also allows borrowers to reduce their monthly insurance premiums, but not all mortgage companies offer it as an option.

FHA Mortgage Insurance Premium

FHA loans offer alternative financing terms for borrowers who might otherwise not qualify for a conventional mortgage. The Federal Housing Administration insures FHA loans, encouraging FHA-approved lenders to extend mortgages to individuals who may present more risk. FHA loans may only require down payments as low as 3.5 percent of the purchase price—a significantly lower requirement than a conventional mortgage may offer. However, borrowers will need to pay a mortgage insurance premium—also referred to as MIP in the case of FHA loans—to take advantage of these lenient down payment and eligibility requirements.

Unlike PMI attached to a conventional loan, MIP can never be removed from an FHA loan. FHA borrowers must pay MIP every month for the entire life of the loan, which could run 30 years with a fixed-rate FHA mortgage.

How Much is Mortgage Insurance

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Do I Need Mortgage Insurance?

When faced with the prospect of paying for private mortgage insurance, the first question many home buyers ask is “What is PMI?” That question is closely followed by “Do I actually need it?” The answer to the latter is that it’s largely outside of the borrower’s control. The lender will decide if home buyers need to pay mortgage insurance after assessing their qualifications as a borrower. A team of underwriters will review the applicant’s personal finances, credit history, debt obligations, income streams, and loan terms to determine when PMI is necessary and, if so, how much is owed. There are several factors lenders consider when attaching private mortgage insurance, some of which borrowers can influence and others beyond their control.

Down Payment of Less Than 20 Percent

Lenders will almost certainly require PMI on any conventional loan with a down payment that’s less than 20 percent of the purchase price. Mortgage companies may have some concerns about loan applicants who lack the liquidity to make a 20 percent down payment, so they will attach PMI to mitigate any risk of default.

Loan-to-Value Ratio of 80 Percent

An 80 percent LTV ratio essentially means the lender owns an 80 percent ownership interest in the property, while the borrower owns 20 percent. This is typically the threshold that lenders consider when determining if a loan needs mortgage insurance. An LTV higher than 80 percent will often necessitate private mortgage insurance, but lenders may have their own underwriting standards requiring even lower LTV ratios to avoid PMI.

FHA Requirements

FHA loans always come with a mortgage insurance premium to offset the risk that both the FHA and lenders take on when extending loans to borrowers who are unable to qualify for conventional home loans. When using an FHA loan to finance a home purchase, buyers will need to pay mortgage insurance every month for the entire duration of the loan. As noted, FHA mortgage insurance can never be removed regardless of how much equity homeowners accumulate in the property.

Conventional Lender Requirements

Mortgage insurance is, at its most basic level, a risk-mitigation tool. Every lender has its own risk threshold, which can lead to varying requirements when deciding when to apply private mortgage insurance to conventional home loans. Lenders do not publish these requirements for public consumption, and underwriters may weigh eligibility factors on a case-by-case basis. As such, it’s difficult for home buyers to know exactly what requirements need to be met to avoid paying mortgage insurance. That being said, making a 20 percent down payment will often satisfy many lenders. It’s a good idea to clarify PMI requirements with a loan officer when applying for a mortgage.

How Much is Mortgage Insurance

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Benefits of Mortgage Insurance

Many homeowners think of mortgage insurance as a burden, raising the loan costs when buying a house. While PMI certainly adds an extra expense to monthly mortgage payments, its existence can actually benefit home buyers—especially those who may not present ideal borrower qualifications. In some cases, lenders may only agree to extend a home loan because they can use private mortgage insurance to reduce their financial risk.

Less Cash Needed Up Front

Mortgage insurance can be a bit of a trade-off for borrowers. On the one hand, PMI is another cost that needs to be accounted for when budgeting for the monthly mortgage payment. On the other hand, home buyers will also owe less at the outset of the home loan with a smaller down payment requirement. Saving up for a 20 percent down payment can be very difficult with all the other financial obligations in a person’s life, and paying mortgage insurance can be a way to get a home loan without needing a significant amount of cash up front. As such, PMI may help home buyers afford a mortgage even if their application qualifications are less than sterling.

Lowers Risk to Lenders

Some home buyers may question PMI’s meaning and purpose, wondering why private mortgage insurance is necessary at all. It’s important to remember that lenders take on a significant amount of risk when extending home loans totaling hundreds of thousands of dollars. It could be very difficult to recoup any losses if the borrower were to default on the loan. Attaching private mortgage insurance helps lenders mitigate some of that risk by charging extra money each month. Although paying PMI insurance may seem like a burden for borrowers, it can actually work out better in the long run. Without mortgage insurance to reduce the risk of extending loans to less eligible borrowers, mortgage companies might otherwise simply reject those loan applications altogether.

How to Save Money on Mortgage Insurance

Now that you have a solid grasp on how mortgage insurance rates are set, you can consider potential options to lower PMI costs when buying a home. Lenders have the final say determining what mortgage insurance rate to use in any given situation, but there are some steps home buyers may be able to take to reduce this expense.

  • Shop around for a home loan and see if lenders can offer a better rate on mortgage insurance. It’s a good idea to inquire whether loan preapproval requires a soft pull or hard pull on the applicant’s credit history. Soft pulls minimally affect credit scores, while multiple hard inquiries could negatively impact credit scores.
  • Ask the lender if they can change any loan terms to lower the mortgage insurance rate. Earmarking more money for the down payment is the most effective way to lower PMI costs, but adjusting other financing terms could help as well.
  • If eligible, consider other types of mortgages like VA home loans that do not require mortgage insurance.
  • Improve your financial situation, boost your credit score, and then apply for a home loan with more impressive borrower qualifications.

How Much is Mortgage Insurance

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Questions to Ask About Mortgage Insurance

Transparency is not always a strong suit among mortgage companies. They may not specify how PMI mortgage insurance is assessed or if there are other PMI options for borrowers to consider. Before signing a mortgage agreement, it can be helpful to ask about mortgage insurance and get more details about how it will be managed.

  • How much is mortgage insurance each month?
  • Do you have a PMI calculator to help anticipate my insurance premiums?
  • When will I be able to remove mortgage insurance from my home loan?
  • How do I remove PMI from my mortgage?
  • What can I do to reduce my mortgage insurance premium?
  • Can I get a better rate on my mortgage insurance?
  • What payment structures can I use to pay PMI?

FAQs

With so many other costs and logistics to figure out before the closing date, first-time home buyers can be blindsided by mortgage insurance requirements. Since lenders keep key details regarding PMI away from the public eye, it can be difficult to find an answer to even the most straightforward questions like “How much is PMI?”

Q. How much is mortgage insurance usually?

The national average for PMI is 1.25 percent of the total loan amount, but mortgage insurance rates can run anywhere from 0.5 percent to 2.0 percent on average. Exact rates will vary depending on the lender’s policies and the borrower’s qualifications.

Q. How can I avoid PMI without 20 percent down?

It is unlikely that a mortgage lender would waive PMI on a conventional loan with a down payment that’s less than 20 percent of the loan amount. Home buyers could explore certain government-backed loans like VA loans as an alternative. Eligible borrowers are not required to pay PMI on a VA loan. In fact, VA loans don’t require a down payment at all. Borrowers may owe a VA funding fee, but that will often be significantly less than either a down payment or PMI insurance.

Taking out a second mortgage—known as a piggyback loan—is another option to avoid PMI. When home buyers use this approach, the initial home loan won’t cover the entire purchase price. The first home loan will cover enough to meet the lender’s PMI requirements so mortgage insurance won’t be required. Then the borrower takes out the second loan to pay the difference between the first loan and the sale price, minus the down payment.

There are caveats to consider with a second mortgage, though. Mortgage rates on piggyback loans will likely be higher because the first loan will increase the borrower’s existing debt, which is an important factor that lenders look at when vetting loan applications. In general, it may be difficult to secure two home loans without strong eligibility qualifications like a high credit score, stable income, and minimal debt beyond the first mortgage.

Another potential option is to schedule a new home appraisal if the property’s market value has gone up significantly since the purchase date. A new appraisal could lower the LTV ratio below 80 percent, which should allow homeowners to cancel their mortgage insurance. However, lenders often require borrowers to make a certain number of payments before they will consider a reappraised value and remove PMI.

Q. How much is PMI on a $100,000 mortgage?

The exact amount of PMI owed will depend on the interest rate set by the lender. Assuming the mortgage insurance rate is in line with the national aveage—1.25 percent—then the homeowner would owe $1,250 each year on PMI.

Q. How much does PMI cost monthly?

Using the interest rate and loan amount, home buyers can determine approximately how much they will spend on PMI mortgage insurance each year. Divide the annual premium by 12 to see what the monthly payment will look like. In the case above—a $100,000 home loan and 1.25 percent interest rate—the monthly premium would come out to approximately $105.

Q. Does PMI ever go away?

PMI on conventional loans can be removed once the borrower accumulates at least 20 percent equity in the property. Borrowers may need to officially request for PMI to be removed before lenders will take action, though. Otherwise, PMI on a conventional loan will be automatically removed once the homeowner has accumulated 22 percent equity. Private mortgage insurance can never be removed from an FHA loan, so the only option would be to refinance to a different loan type.

Q. Is PMI based on credit score?

PMI is not based solely on credit history, but a person’s credit score will influence the mortgage insurance rate. Credit scores can be good indicators of a borrower’s ability to manage debt, so lenders often take them into consideration when determining interest rates.

Q. Does every mortgage require a down payment?

Certain specialized loan products do not require a down payment. Most notably, eligible borrowers may be able to secure a VA loan without putting any money forward for a down payment.

https://www.bobvila.com/articles/how-much-is-mortgage-insurance/

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