How Much Is Mortgage Insurance Per Month?

Oct 17, 2022 | Mortgage Guides

A Comprehensive Guide on the Costs of Mortgage Insurance

When taking out a loan to finance or refinance a home, it is crucial to understand the associated costs. One such expense could be mortgage insurance. This expense is often required of homebuyers whose down payment does not meet the standard threshold. 

‍If you are considering buying a home, read on to learn more about how this insurance works, how much it costs, and what having it means in the long term.‍

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Mortgage Insurance 101

Mortgage insurance is often required of borrowers as a condition of their home loan. It is a policy that protects lenders against loss if a borrower defaults. The cost of mortgage insurance varies depending on the loan amount, credit score, and, most importantly, the down payment.‍

Conventional lenders refer to it as private mortgage insurance (PMI) and require it when a homebuyer makes a down payment of less than 20 percent of the home’s price. As for the government agency lenders, it varies.‍

FHA loans have a similar requirement called a mortgage insurance premium (MIP). If the down payment is less than ten percent, then you pay MIP for the life of the loan. If the down payment is ten percent or more, you pay MIP for 11 years. USDA and VA loans do not require mortgage insurance but mandate initial one-time payments as either a funding or guarantee fee.

What Is the Purpose of Mortgage Insurance?

Unlike homeowners insurance, which protects the buyer, mortgage insurance protects the lender. If a borrower defaults on the loan, the insurance company pays the lender a portion of the remaining balance. This makes lenders more willing to take on additional risks, such as accepting smaller down payments. As a result, more folks can become homeowners as it requires less money upfront.  

What Are the Types of Mortgage Insurance?

There are five insurances available. Below is a quick overview of each:‍

Borrower-Paid Mortgage Insurance

Borrower-paid mortgage insurance (BPMI) is the most common. It comes in the form of an additional fee on the mortgage. Once the loan closes, BPMI is due each month until you reach 22 percent equity. At that point, the lender must cancel the BPMI. Or, you can request an early cancellation when you have 20 percent if you are up to date on your payments and have no additional liens on the property.

‍It can take about 15 years to accumulate enough equity through regular mortgage payments to get the BPMI canceled.‍

Lender-Paid Mortgage Insurance

As the name suggests, with lender-paid mortgage insurance (LPMI), the lender pays the premium. Alas, that comes at the borrower’s expense of higher interest rates. LPMI is a non-refundable policy built into the loan. Therefore, you cannot cancel it after reaching a specific equity milestone, nor will interest decrease. The one way to cancel LPMI is to refinance.

On the plus side, despite having a higher interest rate, one’s mortgage might still be lower without the PMI payments. That allows homebuyers to qualify for borrowing even more. 

Single-Premium Mortgage Insurance 

Those who prefer to pay a lump sum upfront can consider single-premium mortgage insurance (SPMI). Borrowers pay for their entire mortgage insurance at closing or finance it. Compared to BPMI, mortgage payments are lower with SPMI, which can help to qualify for higher borrowing amounts.

‍Another benefit is not stressing about getting PMI canceled. However, if you refinance or sell within a couple of years, this policy is not refundable. Also, not all lenders offer SPMI. ‍

Split-Premium Mortgage Insurance

The least common is a hybrid that combines factors from BPMI and SPMI. Rather than paying at closing or through installments, this policy allows you to do both. Borrowers do not need the total upfront like SPMI, nor does their mortgage payment increase as with BPMI. 

‍Those with high debt-to-income ratios most utilize the split-premium option as it secures lower payments. It is also worth noting that split premiums can sometimes be refundable after the mortgage insurance gets canceled.  

Federal Home Loan Mortgage Protection

Another type of mortgage insurance is MIP, although it pertains to loans underwritten by the Federal Housing Administration (FHA). All FHA loans require this insurance, including an initial fee and a payment plan. 

‍With down payments of less than ten percent, MIP lasts for the entirety of the loan. For down payments of ten percent or more, buyers cannot remove the MIP until 11 years after closing. Furthermore, refinancing is the only way to cancel MIP when that benchmark is met. 

How Much Is Mortgage Insurance?

The costs vary depending on factors, such as the borrower’s down payment in relation to their loan amount. 

‍Alas, like all other insurances, prices can also be decided by the rates bestowed by lenders. These fees are based on how risky the loan is. A borrower’s creditworthiness, type of loan, and term length all factor into determining one’s insurance rate.

‍While rates are at risk of changing each day, mortgage insurance premiums often are between 0.58 and 1.86 percent of the original loan amount per year, according to data from the Urban Institute.

How Much Is Mortgage Insurance Per Month?

In 2021, Freddie Mac estimated the average mortgage insurance cost to be between $30 and $70 per $100,000 borrowed. The average PMI cost was $111.25, while the average FHA MIP cost was $81.67.

How Is Mortgage Insurance Calculated

The expense of mortgage insurance varies. Costs are calculated based on the borrower’s down payment compared to their loan and the insurance rate. To determine the cost of your mortgage insurance, follow the three steps below:

  1. Calculate Your LTV Ratio: Divide the total amount by the property’s value. Then, to get a percentage, multiply that by 100. Mortgage insurance is not required if the result is less than 80 percent for a conventional or 90 percent for an FHA loan. If it is higher, continue to the next step. 
  2. Determine the Annual Premium: Multiply the total by the mortgage insurance rate. Ask the lender for your specific rate or estimate within the average range of 0.58 and 1.86 percent. This answer details how much is owed each year in mortgage insurance alone.
  3. Determine the Monthly Premium: Last, divide the annual premium by 12 to calculate the monthly cost of this insurance. Often, one’s mortgage will include this additional premium.
How Much Is Mortgage Insurance Per Month | Wesley Mortgage

The Pros and Cons of Mortgage Insurance

Mortgage insurance can be a great way to protect your home’s investment, but it can also increase your expenses. 

What Are the Benefits of Mortgage Insurance?

  • Lower Down Payment Requirements Make It Easier to Qualify for High-Priced Homes: Considering rising home prices, saving for a 20 percent down payment is a challenge. If saving up to 20 percent, the interest rates may increase. This means you could pay more over the life of the loan, as opposed to getting one when rates are lower, even with a smaller down payment. Mortgage insurance allows borrowers to make offers on desirable homes even if they cannot afford 20 percent upfront.‍
  • Paying for Mortgage Insurance Is Temporary: Regarding conventional loans, when a buyer’s LTV ratio drops below 80 percent, aka they reach 20 percent equity, they can request the removal of the insurance. The request may be accepted if they have an admirable payment history with their insurance company. But even if denied, once their LTV falls to 78 percent, lenders are mandated to cancel PMI. Keep in mind that FHA loans with at least a ten percent down payment have to continue this insurance for 11 years.

What Are the Drawbacks of Mortgage Insurance?

  • Premiums Stay the Same While the Payout Decreases: With each premium payment made, the remaining balance decreases. Therefore, the payout matches the remaining balance. Despite the diminishing payout, the borrower’s dues do not follow suit. Until the insurance gets canceled, these premiums will remain exact. 
  • Mortgage Insurance Protects the Lender, Not the Buyer: The sole purpose of mortgage insurance is to protect the lender. Should the borrower default and foreclose on the mortgage, this policy covers the remaining balance. Despite being able to qualify for larger loans, the payments do not provide protection for you. ‍

Frequently Asked Questions About Mortgage Insurance

How Can I Avoid Mortgage Insurance?

Some homebuyers can skip mortgage insurance.  One way is to make a down payment worth at least 20 percent of the price. By doing so and not paying insurance, borrowers can save a lot of money.

‍When buying a home, examine your savings and consult your lender to determine the most sizeable down payment you can afford. If incapable of reaching the 20 percent mark, mortgage insurance may be inevitable, but at least it is not forever. 

What Happens if I Stop Paying Mortgage Insurance?

If a homeowner stops paying the premiums, their creditor may require them to pay the total of the loan. If unable to make these payments, the lender may enforce foreclosure. That would mean the lender takes over the ownership, forcing the borrower to move out. 

Ensure you can make the payments before taking out the loan. Mortgage insurance is an integral part of the home-buying process, and it is essential for real estate buyers to understand how it works.

How Do I Cancel Mortgage Insurance?

Borrowers have several ways to go about canceling the insurance for good. Below are five options to consider:‍

  • Make Payments Until the Policy Cancels: Conventional PMI and sometimes FHA’s MIP have termination dates at which insurance payments cease. Under the federal Homeowners Protection Act, insurance companies must adhere to these dates. 
  • Request Approval for Early Cancellation: If the borrower has a positive payment history with the policy, they may request cancellation as they near the termination date. Nevertheless, the insurance company determines an early decision. 
  • Get a Home Reappraisal: Those who live in areas that appreciate the real estate market may capitalize on that. Schedule a reappraisal, and the insurance might be canceled if it proves you meet the LTV threshold. 
  • Refinance Your Home: Another way to satisfy the mortgage insurance LTV requirement is to refinance. A home refinance may eliminate one’s policy and deliver better loan terms. 

Closing Thoughts

Mortgage insurance is essential when taking out a new house loan. The amount you pay will depend on several factors, from the amount of the loan to the size of the down payment. Alas, this additional cost does not last forever. 

‍Contact a Wesley Mortgage representative today for more information about the mortgage process.

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