Mortgage Insurance: Your Quick Guide To Different Types And Cost

It’s important to understand the costs you’ll be responsible for when you buy a home with a mortgage loan. One of those expenses might be mortgage insurance. We’ll walk you through the different types of mortgage insurance, how it works, how long you’ll have to pay it, the approximate costs and whether you can avoid it.

What Is Mortgage Insurance And How Does It Work?

Mortgage insurance protects against default on home loans. With private mortgage insurance (PMI) mitigating the risk to the investors who own mortgages, folks can make down payments of less than 20% to purchase a home. This, in addition to other measures taken by lenders such as including a mortgagee clause within your homeowners insurance policy, helps to protect mortgage investors.

Having mortgage insurance doesn’t mean you can stop making payments without risking foreclosure. This protection is protection for investors.

When You Might Need To Pay PMI

If you put less than 20% down on a home, most conventional mortgage loans will require you to purchase PMI. A conventional loan is one that isn’t backed by a federal government organization like the U.S. Department of Agriculture (USDA) or the Department of Housing and Urban Development (HUD).

Refinancing can also require PMI. Borrowers who switch from a government-backed loan to a conventional mortgage loan may also have to pay PMI if the homeowner has less than 20% equity in their home.

How Borrowers Pay The Costs Of PMI

Mortgage insurance may be an additional monthly expense you’ll need to consider. If PMI is required, your lender will likely include your PMI expense in your monthly mortgage payment automatically. The lender oversees selecting the mortgage insurance company, so you won’t be able to shop around. But you can ask for a quote before you finalize your paperwork.

Mortgage Insurance Cost: What To Expect

Mortgage insurance costs depend on the type of insurance you have as well as the type of loan. On average, you can expect to pay 0.1% – 1% of your home loan amount annually with PMI.

Your premiums for PMI will depend on:

• Your PMI type
  
• Whether the interest rate is fixed or adjustable
  
• The length of your home loan, also known as your mortgage term
  
• Your loan-to-value (LTV) ratio
  
• The insurance coverage amount required by your lender
  
• Your credit score
  
• Your home’s value
  
• Whether the premium is refundable
  
• Additional risk factors, which will be determined by your lender

For instance, if you have a low credit score and only put down a 3% down payment, you’ll likely pay a higher amount for your mortgage insurance than a buyer with a better credit score who put down more money on the same home.

How Is Mortgage Insurance Calculated?

If you want to make a conservative estimate before applying for a loan, it’s best to expect a 1% rate. Your premium will be recalculated every year as you pay off your principal, so expect it to decrease with time.

Let’s say you put 5% down on a $200,000 home, leaving you with a $190,000 conventional loan. If the mortgage insurance company is charging you 1%, your annual PMI payment is $1,900. Your lender will likely consolidate the monthly PMI fee of $158.33 along with your mortgage payments.

You can also use our mortgage calculator to get an estimate that includes property taxes, homeowners insurance and mortgage interest.

PMI Vs. Mortgage Protection Insurance

In addition, you may want to include any expenses from mortgage protection insurance. This is different from mortgage insurance and helps borrowers and their families cover their mortgage in the event payments can’t be made. Though it’s not required, mortgage protection insurance may be an additional expense you’ll want to account for when estimating monthly payment costs.

3 Types Of Mortgage Insurance: An Overview

There are three different types of mortgage insurance you should be aware of. Here’s a quick overview of each type.

1. Borrower-Paid Mortgage Insurance

In most cases, your PMI will be borrower-paid mortgage insurance (BPMI). BPMI is the type of mortgage insurance that’s rolled into your monthly mortgage payment.

Let’s break down how it could affect your costs. Typically, you’ll pay about 0.5% – 1% of your loan amount per year for PMI. This translates to $1,000 – $2,000 per year in mortgage insurance for the average U.S. homeowner who is required to carry coverage, or about $83 – $166 per month.

2. Lender-Paid Mortgage Insurance

Lender-paid mortgage insurance (LPMI) means your lender initially pays your mortgage insurance, but your mortgage rate is slightly higher to compensate for that lender payment. The interest rate increase is typically 0.25% – 0.5% more for LPMI. You’ll save on monthly payments and you’ll have a lower down payment because you’re not required to have 20% down with LPMI.

The lower your credit score, the higher your interest rate will be. LPMI will cost you more if you have a lower credit score. Also, you’ll never be able to cancel LPMI (unless you refinance) because it’s built into your payment schedule for the entire life of the loan.

3. FHA Mortgage Insurance Premium

Most Federal Housing Administration (FHA) home loans, which are first-time home buyer loans financed through the federal government, also require the purchase of mortgage insurance. This is called a mortgage insurance premium (MIP).

In most cases, you pay mortgage insurance for the duration of your loan term unless you make a down payment of 10% or more (in which case, MIP would be removed after 11 years). You’ll need to pay a couple of ways. First, an FHA loan upfront mortgage insurance premium (UFMIP), which is usually about 1.75% of your base loan amount.

In addition to FHA UFMIP, you’ll also pay an annual mortgage insurance premium. Annual MIP payments run approximately 0.45% – 1.05% of the base loan amount.

Mortgage Insurance Premiums: How They Work

MIP works similarly to borrower-paid mortgage insurance, but it has a few key differences. Like BPMI, you’ll pay a monthly amount, typically rolled into your mortgage payment.

Here’s how it could work: You’ll pay a one-time-only upfront payment that is 1.75% of the loan amount. If your home loan is for $200,000, expect to pay (or roll into your loan) $3,500 for UFMIP at the time of closing. FHA loans also require you to pay an average of 0.85% of your home loan for MIP throughout the duration of your mortgage. This percentage can run higher, depending on how much of a down payment you put down on your loan.

How To Avoid PMI

Since paying PMI doesn’t add to home equity, doesn’t impact the loan balance and has no connection to the purchase price of a home, many home buyers try to avoid it or cancel it, when possible. Let’s review some ways you can dodge paying monthly premiums when buying a home.

Make A Bigger Down Payment

One easy way to avoid PMI is to make a hefty down payment. In many cases, 20% of the purchase price should be sufficient on a conventional loan.

Get A Loan That Doesn’t Require Mortgage Insurance

Some loans might not require PMI. One example is a Department of Veterans Affairs (VA) loan, which is open to those who served in the U.S. military or their families. Rather than monthly premiums, borrowers pay an upfront funding fee. VA loans even have exemptions to the funding fee, which can help eligible borrowers get an even better deal on their loan.

Try To Cancel PMI When You Have 20% Equity

Once you hit 20% equity in your home, it’s possible to get your obligation to pay PMI canceled. Your PMI disclosure form should have the first date you can request cancellation. You’ll need a solid history of making monthly mortgage payments and proof that you don’t have a second mortgage or similar lien on your home.

Home Mortgage Insurance FAQs

Let's discuss some of the most frequently asked questions regarding mortgage insurance.

What does mortgage insurance cover?

Mortgage insurance acts as insurance protection for your mortgage lender in case you end up unable to make your mortgage payments. This type of insurance relieves the lender of any responsibility for those mortgage payments.

How long do I need to have mortgage insurance?

The good news about PMI is that in most cases, you won’t have to continue paying it for the entire length of your home loan. Most mortgage insurance plans allow you to cancel your policy once you’ve paid off more than 20% of the full loan amount of your home.

Do USDA loans require mortgage insurance?

USDA home loans are for buyers who purchase a home in a rural area. These loans are financed through the U.S. Department of Agriculture (USDA) and don’t require private mortgage insurance – no matter your down payment amount. You must pay an upfront fee of 1% of your loan amount and an annual 0.35% fee that will serve as a replacement for mortgage insurance payments.

Rocket Mortgage^® doesn’t offer USDA loans at this time.

Do VA loans require home mortgage insurance?

The U.S. Department of Veterans Affairs backs VA home loans for military veterans, active duty and reserve military members or qualified surviving spouses. These loans have no down payment options and no mortgage insurance requirements.

Is PMI tax deductible?

The Internal Revenue Service (IRS) says that itemized deductions for mortgage insurance premiums have expired, so homeowners can’t claim it as a deduction.

The Bottom Line: Mortgage Insurance Makes Homeownership More Accessible

The cost of PMI is an extra expense you should plan to pay if you opt for a conventional loan and put less than 20% down on your home. Mortgage insurance offers greater access to homeownership for borrowers who are unable to pay 20% on a down payment. That’s because PMI protects the lender if you default on your loan.

Are you ready to get started on the mortgage process? Start the application process today.