How Much Is Mortgage Insurance?
How much does mortgage insurance cost? It depends on the type of loan you have, but typically, it’s around 0.5% of your total home loan amount each year.
If you’re not sure what kind of loan you have, talk to your lender or property representative; they’ll be able to tell you.
What is Private Mortgage Insurance (PMI)?
There are different types of private mortgage insurance, but they all offer a similar service: to protect your lender in case you don’t make your mortgage payments.
Lenders have several options when it comes to insuring mortgages, but they can’t avoid paying for PMI coverage entirely.
If you’re thinking about buying a home with little or no money down, consider how much is mortgage insurance and weigh its costs against those of other available financing alternatives. Read on to learn more about how much is mortgage insurance and how it works.
When calculating how much mortgage insurance you need, there are two factors that come into play: how large a loan amount you want to finance and what type of property you want to buy.
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The bigger your loan amount, especially if you intend to purchase a single-family house rather than an apartment building or commercial structure, means higher how much is mortgage insurance premiums.
Similarly, homes appraise at lower prices mean lower premiums while houses that exceed their appraisal values mean higher premiums.
The Federal Housing Administration (FHA) insures mortgages with down payments as low as 3.5 percent, but borrowers must pay for PMI until they reach 22 percent equity in their home (or 25 percent equity for loans insured by Fannie Mae or Freddie Mac).
In other words, you’ll continue paying PMI until your home’s value increases enough to offset its riskiness to lenders. What Are Some Alternatives to Private Mortgage Insurance?
If you don’t have enough money saved up for a 20 percent down payment on your home, then you can consider some alternatives to private mortgage insurance.
One option is a piggyback loan, which lets you borrow more money from another lender after obtaining an 80/20 conventional mortgage from your primary lender.
You’ll make payments on both loans and will eventually be able to pay off your second loan in full when you’ve reached 20 percent equity in your home.
Another alternative is to get a second job or increase your income through freelance work or side gigs.
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For example, if you make $1,000 per month freelancing while working full-time at a regular job that pays $3,000 per month, then it might be possible for you to put together a $10,000 down payment without PMI coverage.
When do you need it?
The answer depends on whether you’re a first-time homebuyer. If so, you can only get mortgage insurance for your new home if you make a down payment of less than 20 percent.
That’s what makes it seem like a mortgage insurance is expensive; often, it isn’t an additional cost at all. It just fills in that gap between your down payment and 20 percent. In other words, if you put 5 percent down on a $200,000 house, you need to pay for mortgage insurance because your down payment was less than 20 percent.
If you put 10 percent down on that same house, though, there would be no need to pay for mortgage insurance because your down payment would be equal to or greater than 20 percent of the purchase price.
So how much does mortgage insurance cost? The amount varies depending on how much you owe, but most people will pay about 1.5 percent of their loan amount per year for up to 30 years. For example, if you owe $100,000 on your home loan, you might have to pay about $1,500 per year for mortgage insurance.
Again, that’s assuming you put less than 20 percent down. If you put more than 20 percent down, then you won’t have to pay for mortgage insurance at all.
And even if you do end up paying for mortgage insurance, it shouldn’t break your budget, especially when compared with other costs associated with buying a home. But keep in mind that mortgage insurance is usually not optional.
If you don’t want to pay for it, then you’ll have to put more money down on your home purchase. That means you’ll probably need to come up with a larger sum of cash upfront. To learn more about how mortgage insurance works, read Nolo’s Essential Guide to Buying Your First Home.
Why does it cost so much?
The cost of mortgage insurance depends on a few different factors, including how much you put down, your credit history, and where you live.
There are two types of mortgage insurance: private mortgage insurance (PMI) and government-backed mortgage insurance (GMI).
PMI is required if you don’t make a 20 percent down payment on your home purchase. Government-backed GMI only applies to certain loans that fall below a certain loan-to-value ratio, typically 90 percent or 95 percent.
If you have either type of mortgage insurance, it will be included in your monthly payments. It will also appear as an itemized deduction on your tax return.
You can deduct mortgage insurance premiums from your taxes, but there are limits on how much you can deduct each year. Read more about mortgage insurance here.
As far as initial costs go, mortgage insurance is relatively low. For example, when purchasing a $200,000 house with 5 percent down ($10,000), your premium would range between $1,725 and $2,435 per year for private mortgage insurance depending on where you live or just over $200 per month at most.
However, monthly fees tend to increase if your total loan balance grows past 80 percent of its original value due to something called force-placed insurance charges.
These additional fees can add up quickly, so make sure you’re aware of them before they happen.
If you’re looking to buy a home or refinance your current mortgage, be sure to shop around for quotes from multiple providers in order to get an accurate estimate of what it will cost. Remember that these are only estimates; there are other factors that could change how much it ends up costing in the end.
What are your options to avoid PMI altogether?
If you have less than 20% equity in your home, then you will likely need to pay for private mortgage insurance (PMI). But PMI isn’t your only option. Here are some other strategies that could help you avoid paying for mortgage insurance.
The first thing to do is check with your lender about refinancing options. Reducing your interest rate can lower your monthly payments and put more of your payment toward principal rather than interest.
This can effectively lower how much you owe on a monthly basis, which may be enough to take advantage of current low down payment loan programs.
If you don’t want to refinance, then another option is a cash-out refinance, in which you use some of your home equity for other purposes (such as paying off high-interest debt or funding an investment).
You’ll need at least 20% equity in order to do so, but if that’s not an issue for you then it could provide some relief from PMI.
Mortgage insurance premiums are typically calculated based on your loan amount, so reducing your loan amount through any of these strategies will likely reduce your premium. And remember: if you have less than 20% equity in your home when you close on a new mortgage, then chances are good that you’ll have to pay for private mortgage insurance at some point during your mortgage term.
You may also qualify for a VA loan without having to pay PMI. VA loans require no down payment and offer competitive rates—but there are income limits on who can qualify.
Finally, consider renting out part of your home instead of selling it outright. If you live in an area where real estate prices are rising quickly, then you might find yourself stuck trying to sell a property whose value has grown substantially since you bought it.
What are the most common mistakes people make when trying to save money on PMI?
Saving money on mortgage insurance is one of those elusive pursuits that many people try to do, and it seems simple enough. However, PMI can be tricky and there are a lot of common mistakes that people make when trying to save money on PMI.
These mistakes can easily add up over time so it’s important for consumers to know what they are doing in order to save as much money as possible. Here’s a look at some of the most common PMI mistakes that people make and how you can avoid them.
Make sure you have an escrow account: When it comes to saving money on PMI, one of the biggest mistakes people make is not having an escrow account set up.
An escrow account isn’t really something that most first-time homebuyers think about because it doesn’t come into play until after closing occurs.
Can you claim PMI as a tax deduction on your taxes?
While it’s true that PMI, or private mortgage insurance, is technically considered a mortgage expense and not an insurance expense meaning you cannot deduct it on your taxes—it still comes with a hefty price tag.
In fact, private mortgage insurance premiums accounted for 1.2 percent of total home purchase borrowing costs in Q3 2014, according to data from real estate analytics firm CoreLogic.
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And although you can’t claim PMI as a tax deduction, there are other ways to reduce its cost. For example, if you put down 20 percent or more when buying your home, some lenders will allow you to cancel your policy after two years.
Or if you have excellent credit and/or equity in your property (at least 25 percent), some lenders may let you drop coverage after just one year.