How Much Does Mortgage Insurance Cost?

When you’re a borrower, the first thing you’re going to want to know is the expenses. You’re probably thinking to yourself “How Much Does Mortgage Insurance Cost?”

Mortgage Insurance tends to cost around 0.5% – 1.5% of the total loan. A property that’s valued at $400,000 would have to be $2,000- $6,000 in mortgage insurance. Divide that by 12 and you’re paying around $166-$500 a month.

Through this article, we’ll show you what factors into the final cost of the mortgage insurance. We’ll explain the pros and cons of PMI to help give you a better understanding. By the end, you’ll know how to utilize the mortgage to your advantage. 

How Much Does Mortgage Insurance Cost

So How Much Does Mortgage Insurance Cost? Your mortgage insurance cost is calculated by a percentage (0.5% – 1.5%) and is added onto the total loan cost. 

To get a basic understanding, a mortgage insurance reduces the risk for a lender. When taking out loans, the lender is at risk when the borrower defaults on the loan. If they are unable to make their monthly payments, the lender loses credit. 

Mortgage insurance companies require their borrowers to take out a mortgage insurance policy. That’s because they can reduce the liability and financial risk from the borrower. It is mandatory if you’re taking out a FHA mortgage; also if you pay only 20% on a loan down payment for conventional loans.

You’ll still be liable if the loan defaults. If you are unable to pay for the mortgage, your home can go into foreclosure and you could lose the home. So always make sure to take your expenses into consideration before applying for a mortgage. 

Mortgage Insurance is split into four different subsections: 

  • FHA: The FHA loans have a 3.5 % downpayment. They have a better credit qualification in comparison to conventional loans. That’s because they tend to accept a lower credit score, and 0.45% – 1.05% as an annual premium range.  
  • VA Funding: With VA Funding, they offer low interest, no downpayment for military members that are active, on reserve or currently disabled. Borrowers will reach up to 1.4% – 3.6% for their purchase loans. 
  • PMI: Private Mortgage Loans require a 3% down payment. Lenders will require you to have a PMI loan if you have less than 20% downpayment. 
  • USDA: If you’re a rural homebuyer, the USDA loan is suited for you. It has zero-down payment loans and an annual fee you must pay throughout the loan. 

As a borrower, you’ll want to make sure you’re getting the most legitimate mortgage service possible. Because of that, you’ll want to avoid a second mortgage. 

After you’ve paid some of the loan, you can cancel the mortgage insurance. If you can cancel, this won’t reduce the monthly cost. This option tends to be cheaper for the borrower, but that’s not always the case. 

Why Should I Pay For Mortgage Insurance?

While its cost can be off putting at first, there’s a lot of reasons why you should consider getting it. What would occur if a family member or spouse passed away? These situations can make it difficult for people to cover their expenses and mortgage payments. Here are some reasons why: 

Fixed Premium

No longer do you have to worry about varied payments. With a mortgage insurance, you can buy $300,000 coverage on a house with a $300,000 mortgage placed on it. 

If you went through a bank, the insurance coverage would lower while the insurance premium would stay the same. 

Less Seeking Around

When you have to get mortgage insurance from a company, you don’t have to seek out mortgage insurance throughout the policy’s term. Also, the cost won’t change or increase over time. 

Banks require more negotiation in comparison. You will have a higher premium based on your health changes and age. 

Contract Ownership

If you’re getting mortgage insurance from a bank, they have control over the beneficiary and contract. If you get it from a mortgage insurance company, then you can give it any beneficiary name. 

Overcome Financing Barriers

While home buyers might not have been qualified for the mortgage, they have benefitted with the help of mortgage insurance. For instance, people who work self-employed work via a commission.

Through the help of mortgage insurance, if you have good credit, but do not meet the lender’s criteria, you can still obtain a loan. 

Better Acceptance Rate

Unlike getting loans or life insurance, you’ll have a better chance of getting accepted via mortgage insurance. It is a good choice for people with riskier jobs or health concerns. With mortgage insurance, it helps borrowers and lenders who have a limited budget.  

Things to Consider When Getting Mortgage Insurance

No Tax-Deductible

Previously, the mortgage was able to be tax deductible. But until 2017, a law stated that the PMI was tax-deductible under $110,000 a year. This meant that there were no tax deductibles, making it less of a tax asset over time.  

Heirs Won’t Receive Proceeds

Most homeowners won’t be able to give their insurance policy coverage to their children. Instead, the proceeds go straight to the lending institution. Since the mortgage institution only protects the lender, you’ll need a separate insurance policy if you want to pass it down to your heirs. 

Difficult to Cancel

Usually, if you have equity that’s above 20%, then you don’t have to pay for PMI. But getting rid of the monthly burden isn’t as simple as not giving the payment. Lenders require their borrowers to have a drafted letter requesting to cancel the PMI. 

This cancellation process can take over months to complete. Based on the quality of the lender, it might take even longer for the mortgage insurance to be fully paid.  

Conclusion

To conclude, you’ll pay 0.5%-1.5% for your mortgage insurance loan. While your credit history and loan verification may take some time, lenders can feel protected in the long run. Consider getting mortgage insurance if you want the utmost financial protection during a loan default.