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How Much is Mortgage Insurance

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.
Quick Navigation
What Is Mortgage Insurance?
Is There a Need for and How Much Is Mortgage Insurance?
How Much is Mortgage Insurance?
Pros and Cons of Mortgage Insurance
Conclusion
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?

mortage insurance for a new property

Image by Nattanan Kanchanaprat from Pixabay

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) 

There are benefits to skipping a huge down payment and paying PMI instead. It’s not always possible to pay a down payment that’s tens of thousands of dollars or more. The time it might take you to save the kind of money to put down on a home could be years, but the total cost of your PMI might not come close to even touching what you’d need to save over the years to make the appropriate down payment.

Additionally, you do have some options when it comes to paying private mortgage insurance. For one, you can take the risk of paying it for a year and refinancing. If you think your home value will increase over time, you can refinance your home for the same purchase price at a lower rate or even the same rate but at a new value.

Here’s how that works. Let’s say you buy a home, and you put some work into it. You paint, add granite and upgrade your appliances, flooring and fixtures. The work you put in and the housing market over the first year of your homeownership might make your house more valuable.


If it appraises for more than you bought it for, you might be able to refinance the home for what you owe, and that might be less than 80 percent of the new appraised value. It can eliminate private mortgage insurance.


It’s a good buy if you think you can get a house that will increase that much in value over the course of a year or two. Otherwise, you can continue to pay your PMI until your loan reaches 80 percent of the purchase price, and then you can cancel it.

Cons of Private Mortage Insurance (PMI) 

How much is mortgage insurance? It’s expensive. That’s how much it is. It’s a lot like rent money. You’re paying it every month, but you have nothing to show for it at the end of your rental terms. Your PMI payments do not affect the amount you owe on your home. That $2,660 per year used in the above example is not going toward your home, and you’re not getting it back if you sell.

The other big downfall of PMI is that you may not be able to afford the home you want if you must pay PMI. Let’s say you did the math, and you can afford to pay the monthly payment on a home that costs you $350,000. This monthly payment includes your taxes and insurance, and you know you can comfortably pay for that, but it’s at the very top of your budget

Now let’s say you end up paying 1 percent of the loan value after you put down 5 percent. That’s $277 per month or $3,325 per year. You cannot afford to pay the additional $277 per month and still be able to afford to live. Now you need to shop for a home that costs less so you can drop your payment to accommodate your PMI.


For example:  if you need to keep your entire mortgage payment with taxes, insurance and PMI below $2,100 per month, you can only afford to buy a home that costs $308,000. That’s a lot less than you can afford if you don’t pay for PMI.

Pros

  • Buying a a home without a down payment
  • Becoming a homeowner sooner
  • Ability to cancel PMI when your loan-to-value is below 80 percent

Cons

  • High cost
  • Being forced to choose a less expensive home
  • No return of money spent to pay insurance 

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.

Featured Image by Tumisu from Pixabay

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