If you’re in the market to buy a home, chances are you’ve heard of mortgage insurance. It’s a type of insurance that protects the lender if you default on your loan. But how much does mortgage insurance cost, and what factors determine the cost? In this article, we’ll answer these questions and more.
What is Mortgage Insurance?
Before we dive into the cost of mortgage insurance, let’s quickly go over what it is. Mortgage insurance is a type of insurance that protects the lender if the borrower defaults on their loan. If you’re putting less than 20% down on a home purchase, you’ll typically be required to have mortgage insurance. The two main types of mortgage insurance are private mortgage insurance (PMI) and mortgage insurance premium (MIP). PMI is required for conventional loans, while MIP is required for FHA loans.
How Does Mortgage Insurance Work?
When you get a mortgage, the lender is taking a risk by lending you a large amount of money. If you default on your loan, the lender could lose a significant amount of money. Mortgage insurance helps protect the lender from this risk. If you stop making payments on your mortgage, the insurance company will pay the lender a portion of the outstanding balance.
Mortgage insurance is typically required until you reach a certain level of equity in your home. With a conventional loan, you can request to have the PMI removed once you’ve reached 20% equity in your home. With an FHA loan, you’ll typically need to refinance your loan to get rid of the MIP.
How Much Does Mortgage Insurance Cost?
The cost of mortgage insurance varies depending on several factors, including the type of loan you have, the amount of your down payment, and your credit score.
PMI Cost
With a conventional loan, the cost of PMI is typically between 0.3% and 1.5% of the original loan amount per year. So if you have a $200,000 loan and your PMI rate is 0.5%, you’d pay $1,000 per year (or $83.33 per month) for PMI.
The exact cost of PMI will depend on your credit score and the size of your down payment. If you have a lower credit score, you’ll typically pay a higher PMI rate. Likewise, if you have a smaller down payment, you’ll typically pay a higher PMI rate.
MIP Cost
With an FHA loan, the cost of MIP is a bit more complicated. There are two types of MIP: an upfront premium and an annual premium. The upfront premium is 1.75% of the loan amount, and is typically rolled into the loan. The annual premium varies depending on the size of your down payment and the length of your loan.
For most borrowers, the annual premium is 0.85% of the loan amount. So if you have a $200,000 loan, you’d pay $1,700 per year (or $141.67 per month) for MIP. However, if you have a larger down payment (at least 10%), you’ll pay a lower annual premium (0.45% for a 15-year loan, 0.70% for a 30-year loan).
How Can I Lower the Cost of Mortgage Insurance?
If you’re looking to lower the cost of your mortgage insurance, there are a few things you can do.
Improve Your Credit Score
As we mentioned earlier, your credit score can have a big impact on your PMI rate. If you’re able to improve your credit score, you may be able to qualify for a lower PMI rate.
Make a Larger Down Payment
If you’re able to make a larger down payment, you’ll typically pay a lower PMI or MIP rate. This is because you’re borrowing less money, so there’s less risk for the lender.
Choose a Shorter Loan Term
With an FHA loan, the length of your loan can also impact your MIP rate. If you choose a shorter loan term (such as a 15-year loan), you’ll typically pay a lower MIP rate.
Mortgage Insurance FAQ
Q: Is mortgage insurance tax deductible?
A: Yes, in some cases. If you took out your mortgage after 2006, you may be able to deduct your PMI payments if your income is below a certain threshold. However, this deduction is set to expire at the end of 2020, so it’s unclear if it will be available in future years.
Q: Can I cancel mortgage insurance?
A: Yes, in most cases. With a conventional loan, you can request to have your PMI removed once you’ve reached 20% equity in your home. With an FHA loan, you’ll typically need to refinance your loan to get rid of the MIP.
Q: Is mortgage insurance required for VA loans?
A: No, VA loans do not require mortgage insurance. However, borrowers will typically pay a funding fee, which serves a similar purpose.
Q: How long do I have to pay mortgage insurance?
A: The length of time you’ll have to pay mortgage insurance depends on the type of loan you have. With a conventional loan, you can request to have your PMI removed once you’ve reached 20% equity in your home. With an FHA loan, you’ll typically pay MIP for the life of the loan (unless you refinance).
Q: How do I know if I need mortgage insurance?
A: If you’re putting less than 20% down on a home purchase, you’ll typically be required to have mortgage insurance. This includes both PMI for conventional loans and MIP for FHA loans.
Q: What happens if I stop paying my mortgage insurance?
A: If you stop paying your mortgage insurance, your lender will likely begin the process of foreclosing on your home. It’s important to keep up with your mortgage and insurance payments to avoid this situation.
Conclusion
Mortgage insurance is a necessary expense for many homebuyers, but the cost can vary depending on several factors. By understanding how mortgage insurance works and what factors impact the cost, you can make informed decisions about your home purchase. Remember to shop around and compare rates from different lenders to get the best deal on your mortgage insurance.
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