Mortgage insurance is an extra cost that many homebuyers encounter when securing a mortgage, particularly if they put down less than 20% of the home’s purchase price. It protects the lender in case the borrower defaults on the loan, but it does not provide any direct benefit to the homeowner.
Understanding the costs associated with mortgage insurance can help borrowers plan their finances, compare loan options, and explore ways to reduce or eliminate this expense. This article will break down how much mortgage insurance costs, what factors influence its price, and how to minimize or avoid it.
What is Mortgage Insurance?
Mortgage insurance is required by lenders when a borrower has a high loan-to-value (LTV) ratio—meaning they are financing most of the home’s purchase price. It ensures that the lender gets paid even if the borrower defaults on the loan.
There are two main types of mortgage insurance:
- Private Mortgage Insurance (PMI) – Required for conventional loans when the down payment is less than 20%.
- Mortgage Insurance Premium (MIP) – Required for FHA loans, regardless of the down payment amount.
The cost of mortgage insurance depends on the type of loan, the down payment, the borrower’s credit score, and other factors.
Cost of Private Mortgage Insurance (PMI) for Conventional Loans
Private Mortgage Insurance (PMI) applies to conventional loans that do not meet the 20% down payment requirement. It is provided by private insurance companies, and the cost varies based on the borrower’s risk profile.
How Much Does PMI Cost?
The cost of PMI typically ranges from 0.5% to 2% of the loan amount per year. The exact percentage depends on:
- Down payment amount – The lower the down payment, the higher the PMI cost.
- Credit score – Higher credit scores qualify for lower PMI rates.
- Loan-to-value (LTV) ratio – A higher LTV means higher PMI costs.
- Loan type (fixed-rate vs. adjustable-rate) – Adjustable-rate mortgages (ARMs) usually have higher PMI rates.
Example PMI Cost Calculation
- Home price: $300,000
- Loan amount (with 10% down): $270,000
- PMI rate: 1% annually
- Annual PMI cost: $2,700 ($270,000 × 1%)
- Monthly PMI payment: $225 ($2,700 ÷ 12 months)
How Long Do You Pay PMI?
- PMI can be removed once the borrower reaches 20% equity in the home.
- Lenders automatically cancel PMI when the loan balance reaches 78% of the home’s value.
Cost of Mortgage Insurance Premium (MIP) for FHA Loans
Unlike PMI, Mortgage Insurance Premium (MIP) is required for all FHA loans, even if the borrower makes a large down payment. FHA loans are backed by the government, and MIP helps protect lenders from borrower default.
How Much Does MIP Cost?
FHA mortgage insurance has two parts:
- Upfront Mortgage Insurance Premium (UFMIP)
- One-time fee of 1.75% of the loan amount.
- Usually added to the loan balance at closing.
- Annual Mortgage Insurance Premium (Annual MIP)
- Ranges from 0.45% to 1.05% of the loan amount per year.
- Paid monthly as part of the mortgage payment.
Example MIP Cost Calculation
- Home price: $300,000
- Loan amount: $290,500 (FHA requires 3.5% down)
- Upfront MIP: $5,083 (1.75% of $290,500)
- Annual MIP rate: 0.85%
- Annual MIP cost: $2,469 ($290,500 × 0.85%)
- Monthly MIP payment: $205.75 ($2,469 ÷ 12 months)
How Long Do You Pay MIP?
- If the borrower puts down less than 10%, MIP is required for the entire loan term.
- If the borrower puts down 10% or more, MIP can be removed after 11 years.
- To get rid of MIP sooner, borrowers can refinance into a conventional loan when they reach 20% equity.
Cost of Mortgage Insurance for USDA and VA Loans
- USDA Loans (for rural homebuyers) require a guarantee fee instead of mortgage insurance:
- Upfront fee: 1% of the loan amount.
- Annual fee: 0.35% of the loan amount, paid monthly.
- VA Loans (for veterans and active military members) do not require mortgage insurance. However, there is a VA funding fee ranging from 1.25% to 3.3% of the loan amount, depending on the borrower’s military status and down payment.
Factors That Affect Mortgage Insurance Costs
Several factors influence how much mortgage insurance will cost:
- Credit Score – Higher credit scores lead to lower PMI rates.
- Down Payment Amount – A larger down payment reduces PMI costs.
- Loan Term – 15-year loans usually have lower PMI rates than 30-year loans.
- Loan Type – Fixed-rate mortgages tend to have lower PMI rates than adjustable-rate mortgages (ARMs).
How to Reduce or Avoid Mortgage Insurance Costs
- Make a 20% Down Payment – The simplest way to avoid PMI on conventional loans.
- Use a Piggyback Loan (80-10-10 Loan) – Take a second mortgage to cover part of the down payment and avoid PMI.
- Choose a VA Loan (If Eligible) – No PMI or MIP required for qualified military members.
- Refinance to a Conventional Loan – FHA borrowers can refinance once they have 20% home equity to eliminate MIP.
- Consider Lender-Paid Mortgage Insurance (LPMI) – This option has no PMI payments, but the interest rate is higher.
Conclusion
Mortgage insurance can add hundreds of dollars to a borrower’s monthly mortgage payment, making it important to understand the costs and explore ways to reduce or eliminate it.
- For conventional loans, PMI costs between 0.5% and 2% annually and can be removed once the borrower reaches 20% equity.
- For FHA loans, MIP includes an upfront fee (1.75%) and annual payments (0.45% to 1.05%), which often last for the life of the loan unless refinanced.
- USDA loans require a 1% upfront guarantee fee and 0.35% annual fee, while VA loans have no mortgage insurance at all.
By making a larger down payment, improving credit scores, or refinancing, borrowers can significantly reduce or eliminate mortgage insurance costs, making homeownership more affordable in the long run.