Having to pay mortgage insurance may feel like a nuisance, but it can open doors for many homebuyers. Mortgage insurance protects the lender from situations where the borrower might default on their home loan payments, so it reduces the lender's risk and allowing them to lend to people who do not have 20% cash to put down on the home loan. This can be very helpful for first time homebuyers in the current highly competitive housing market. To help determine how much you can afford, check out our Neat mortgage tools.
How private mortgage insurance (PMI) works
If you’re a homebuyer seeking a conventional loan, but you don’t have at least 20% of the purchase price of the home to make as a down payment, you’ll have to pay private mortgage insurance (PMI). Typically you’ll pay the PMI premium monthly, as a part of your mortgage payment. In some cases, you can pay the premium annually or at closing.
Luckily, you may not have to pay PMI for the life of your loan. Each month, as you make your home loan payments, you’ll be gradually paying down the balance on the principal of your loan. This will help lower your loan-to-value ratio, which expresses how much you still owe versus how much your home is worth. Once your loan-to-value ratio has dropped below 80%, you can ask your lender to cancel the insurance. If it drops below 78%, the lender will automatically cancel it. Once it’s been canceled, you won’t have to make the PMI payments and your monthly mortgage payment will be reduced.
Mortgage Insurance and Loan Types
The way you pay your mortgage insurance varies depending on your type of loan. You can apply mortgage insurance to several different types of loans, including conventional, FHA, and jumbo loans.
With a conventional loan, your mortgage insurance will be set up with a private third party insurance company. Most private mortgage insurance is paid monthly with the mortgage payment. There is often no upfront fee associated with PMI. Your premium with a private mortgage insurance company will vary depending on your credit score and your down payment amount, but are typically a bit cheaper than FHA mortgage insurance rates.
With an FHA loan, your mortgage insurance premium is paid to the Federal Housing Administration. FHA mortgage insurance is required for all FHA loans. With FHA mortgage insurance, your credit score does not affect the cost of the premium, and your down payment only affects the cost if it is below 5%. There is an upfront fee you will pay at closing for your FHA mortgage insurance as well as monthly payments you will need to make.
With a jumbo loan, mortgage insurance gets a bit more complicated due to the high balance of jumbo mortgages. As of 2022, jumbo mortgage limits are $647,200 in most areas and $970,800 in high cost areas such as California and Hawaii. If your home costs more than this, you will need a jumbo mortgage loan. Since jumbo loans are expensive and requirements to qualify are incredibly strict, most jumbo lenders only require a 5-10% down payment with no mortgage insurance.
How much does private mortgage insurance cost?
The cost of private mortgage insurance ranges roughly from .5% to 2% of the principal of the loan annually. Your insurance rate depends on how much cash you put down, your credit score, the loan amount, the type of mortgage, and whether the home is your primary residence. Be sure to keep in mind that if you put down less, your monthly mortgage payment will also be higher, as your loan’s principal balance will be higher.
Is mortgage insurance bad?
Having mortgage insurance is not necessarily a bad thing, and it could help you get into your home much sooner. While it would add to your monthly mortgage payment, it is much easier than saving several thousands of dollars in liquid cash before you can even make your purchase. Some lenders will allow you to put as little as 3% down on the purchase price, helping you get settled into your new home much more quickly.
Get your mortgage without the mess.
When you’re shopping for homes, it is important to partner with a mortgage lender who is dedicated to getting you the home financing that fits your needs. At Neat Loans, we’ve cleaned up the home financing process so you can get your mortgage without the mess. Start applying for your dream home today!
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