How much is mortgage insurance? It’s not an uncommon question when you’re faced with the decision to include it in a mortgage payment or use a down payment to avoid it. Buying a home is expensive, and there are still many people who feel they cannot afford to buy a home because they don’t have a down payment.
Your job is to pay back the mortgage they lend you over the course of 15 to 30 years, depending on your loan. If you don’t pay them back, they can take your house from you and resell it to recoup the loss they suffered when you stopped paying the mortgage.
It’s a situation no one wants to be in, but it does happen. Lenders must protect their investment, but there are times when a lender will give you a mortgage without a down payment if you pay private mortgage insurance. This is when you might find yourself asking, “How much is mortgage insurance?”
What Is Mortgage Insurance?
If you’re asking how much is mortgage insurance, it’s because you need to know if you can afford to pay it. It’s a form of financial protection for the lender when a buyer doesn’t make a down payment.
Traditionally, lenders require a down payment of at least 20 percent of the sales price of the home. It’s the lender's way of protecting their investment in your home. They’re giving you hundreds of thousands of dollars in good faith so you can buy a home.
By asking for a down payment, they’re protecting their investment by being sure there is enough equity in the home to allow them to sell it quickly in the case of foreclosure.
Is There a Need for and How Much Is Mortgage Insurance?
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If you’re asking how much is mortgage insurance, it’s probably because you’re being required to pay it to your lender. Again, It’s a form of financial protection for the lender when a buyer doesn’t make a down payment of at least 20 percent.
Anyone who takes out a conventional loan without making a down payment of at least 20 percent of the sales price is going to pay private mortgage insurance.
It’s how the lender knows they are getting at least some of their money back in case you default on your loan.
There is a need for private mortgage insurance, and that need is not just for the lender. Anytime a buyer cannot afford to put down 20 percent of the value of the home they want to buy, it’s necessary for the lender to charge private mortgage insurance. Without it, many buyers could not afford to become homeowners.
Conventional loans are sometimes the only option for buyers. VA loans are only available to those who were or are in the military. FHA loans are available to almost everyone, but there are so many limits associated with an FHA loan that it’s not possible for everyone to get one.
This leaves many buyers with only the option to apply for a conventional mortgage, but it might not be possible for buyers to have a conventional mortgage and a home if they cannot afford a 20 percent down payment.
If you do the math, that’s $20,000 for every $100,000 the home costs. The average American who can easily afford to purchase and pay for a $350,000 house may not be able to save $70,000 for a down payment. This is where it’s difficult to purchase a home.
It may be affordable to make the monthly payment, but saving that much money could be impossible for a family. That’s why there is a need for private mortgage insurance.
How Much is Mortgage Insurance?
Now that you understand the need for this kind of insurance, you need to know the answer to the question, “How much is mortgage insurance?” It depends.
The average cost of PMI (private mortgage insurance) is .5 percent to 1 percent of the total loan amount. It’s calculated based on your credit score, the amount of the loan you’re applying for and your debt-to-income ratio, among several other factors.
For example, if you purchase a $350,000 with a five percent down payment, you’re financing $332,500. If you end up with an average .8 percent PMI rate, you’re paying $221.66 per month for PMI. That’s an additional $2,660 per year.
Pros and Cons of Mortgage Insurance
If you’re asking, “How much is mortgage insurance,” it’s because you want to know if it’s worth your time to make a down payment, shop for a less expensive home or pay the private mortgage insurance.
Like any type of lending, there are pros and cons associated with paying private mortgage insurance. It’s up to you to determine whether you can afford it and whether it’s worth it to you.
Pros of Private Mortage Insurance (PMI)
Cons of Private Mortage Insurance (PMI)
Pros
Cons
Conclusion
If you’re willing to pay for private mortgage insurance, you can save a lot of money on a down payment and buy a home years sooner than you could otherwise. However, you may need to buy a home that costs less so you can afford to make those payments for years to come.
Understanding how PMI works and what it means for you and your finances is imperative. Don’t agree to a loan until you know the terms, how much it will cost you and what you are willing to pay. What’s a con for someone else might be a pro for you and vice versa.
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