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.