Mortgage insurance is often a required cost for homeowners who purchase a property with less than 20% down payment.
It protects lenders against the risk of default, allowing borrowers to secure loans with smaller down payments.
While this insurance benefits lenders, it’s an additional expense for borrowers. So, how much does mortgage insurance cost?
This guide will explain typical costs, the factors that influence them, and ways to minimize this expense.
What Is Mortgage Insurance?
Mortgage insurance is a policy that protects lenders in case borrowers fail to repay their loans. There are two primary types of mortgage insurance:
- Private Mortgage Insurance (PMI): Required for conventional loans with a down payment of less than 20%.
- Mortgage Insurance Premium (MIP): Required for loans backed by the Federal Housing Administration (FHA).
How Much Does Mortgage Insurance Cost?
The cost of mortgage insurance depends on several factors, including loan type, loan amount, and borrower qualifications. Here’s an overview of typical costs:
1. Private Mortgage Insurance (PMI):
- Annual Cost: Typically ranges from 0.3% to 1.5% of the loan amount.
- Monthly Payment: For a $300,000 loan, PMI might cost between $75 and $375 per month.
2. FHA Mortgage Insurance Premium (MIP):
- Upfront MIP: 1.75% of the loan amount (e.g., $5,250 on a $300,000 loan).
- Annual MIP: 0.45% to 1.05% of the loan amount, depending on loan size and term.
3. USDA and VA Loans:
- USDA Loans: Require a guarantee fee, which functions like mortgage insurance.
- Upfront Fee: 1% of the loan amount.
- Annual Fee: 0.35% of the loan amount.
- VA Loans: Do not require monthly mortgage insurance but may include a funding fee.
Factors That Influence Mortgage Insurance Costs
1. Loan-to-Value Ratio (LTV):
- A higher LTV (smaller down payment) increases the risk for lenders, resulting in higher insurance costs.
2. Credit Score:
- Borrowers with higher credit scores generally qualify for lower mortgage insurance rates.
3. Loan Type and Term:
- FHA loans have fixed MIP rates, while PMI costs vary by lender.
- Longer loan terms may incur higher mortgage insurance costs.
4. Loan Amount:
- Larger loan amounts mean higher premiums since mortgage insurance is calculated as a percentage of the loan.
How to Avoid or Eliminate Mortgage Insurance
1. Avoiding PMI:
- Make a 20% Down Payment: Lenders typically waive PMI when borrowers put down 20% or more.
- Opt for a Piggyback Loan: Use a second loan (e.g., an 80-10-10 loan) to cover part of the down payment.
2. Canceling PMI:
- PMI can be canceled once your home equity reaches 20%, either through loan payments or an increase in property value.
- You can request PMI cancellation in writing once you reach the required equity.
3. FHA Loan MIP Rules:
- FHA loans with a 10% down payment may have MIP canceled after 11 years. Otherwise, MIP lasts for the loan’s lifetime.
4. Refinance to Remove MIP:
- Refinancing your FHA loan into a conventional loan may eliminate MIP if you now have sufficient equity in the home.
Ways to Reduce Mortgage Insurance Costs
- Improve Your Credit Score: A higher credit score can lower PMI costs for conventional loans.
- Increase Your Down Payment: Even increasing from 3% to 10% can significantly reduce premiums.
- Shop Around for Lenders: Different lenders may offer varying PMI rates, so compare options.
- Shorten Loan Term: A 15-year loan typically has lower mortgage insurance rates than a 30-year loan.
- Monitor Your Home’s Value: Rising property values may allow you to cancel PMI sooner.
Is Mortgage Insurance Worth It?
While mortgage insurance adds to your monthly costs, it allows you to:
- Purchase a home sooner without waiting to save a 20% down payment.
- Qualify for better loan terms with less upfront capital.
- Protect your financial stability if you encounter unexpected circumstances.
If you plan to stay in the home long enough to build equity or refinance later, mortgage insurance can be a worthwhile trade-off.
The cost of mortgage insurance varies based on loan type, borrower qualifications, and down payment size.
On average, borrowers can expect to pay between 0.3% and 1.5% of the loan amount annually for PMI, while FHA loans include upfront and annual MIP fees.
To minimize or avoid mortgage insurance, consider strategies like increasing your down payment, improving your credit score, or refinancing when you build sufficient equity.
By understanding how mortgage insurance works and exploring ways to reduce its costs, you can make informed decisions and secure a home loan that aligns with your financial goals.
