You might have found this page by searching for a private mortgage insurance (PMI) calculator. And that’s fair: Of course you want to know much you’ll pay for PMI (known simply as mortgage insurance, or MI, if you’re getting a government-backed loan), and whether it’s a requirement for your loan — it likely will be if your down payment is less than 20%. So what do you need to know about MI and PMI rates?
But let’s dig deeper to help you understand what mortgage insurance is even all about, who has to have it, and why. Our expert-backed primer also includes the variables that affect mortgage insurance rates, strategies for lowering it — and how and when you can get rid of it altogether.
What’s mortgage insurance, and who has to pay it?
Mortgage insurance is designed to protect your lender if you can’t make your payments.
It’s usually required when a borrower gets a conventional mortgage and makes a down payment that’s less than 20% of the home’s purchase price. Some buyers may not put that amount down simply because they can’t afford to do so. Others might prefer to keep the down payment smaller to free up more cash on hand for repairs, remodeling, emergencies, or other eventualities.
To be clear, mortgage insurance does not insure the home, but rather, it insures the loan.
“If somebody has a conventional loan and they only put 5% down — meaning that the lender is going to lend 95% — they’re going to say OK, we’re going to charge you mortgage insurance,” explains Carl Young, a top-selling agent based in the Knoxville, Tennessee region who works with 75% more single-family homes than other agents in his area. The mortgage insurance remains in place, he says, until the buyer can drop it because you’ve accrued 20% or more in home equity.
Katie Padgett, an agent on Young’s team, further explains that mortgage insurance “is going be set up by the lender to protect them. It really doesn’t have anything to do with the house per se. It’s actually just protecting the loan itself because the lender is looking at it as a way of getting value back on what they loaned to you” in the event of a default.
How mortgage insurance works
Your lender may require you to make ongoing monthly mortgage insurance payments, an upfront payment at closing, or a combination of the two (more on this later).
In general, lenders who offer loans with a down payment that’s lower than 20% may include mortgage insurance as part of their monthly mortgage payments. The cost of the insurance will vary based on different factors, such as a borrower’s credit score and the loan-to-value ratio (LTV), the amount owed on the home’s mortgage compared to its appraised value.
The borrower pays these mortgage insurance premiums until they’ve built up at least 20% equity in the home, at which time they can request that their lender drop the insurance. (Borrowers with FHA loans who put less than 10% down when they take out the loan must pay FHA mortgage insurance premiums for the lifetime of the loan.) When the borrower’s principal balance reaches 78% of the home’s value — or the homeowner reaches 22% in equity, in other words — mortgage insurance automatically ends.
You can expect to pay approximately between $30 and $70 in mortgage insurance premiums per month for every $100,000 borrowed. You can also request to cancel it sooner — say, if your home’s value increases through remodeling or market swings, and an appraisal demonstrates that. (But more on that later, too.)
Why lenders require mortgage insurance
Mortgage insurance protects your lender in the event that you stop making your mortgage payments and default on the mortgage.
If the house goes into foreclosure, it will be sold at auction, and it may not attract a high enough price to cover the remaining balance of the mortgage. Mortgage insurance helps make up the difference to the lender.
How much does mortgage insurance cost?
Mortgage insurance costs vary, but they typically range from 0.5% to 1% of the loan amount annually (though it can go up to about 2.25%).
Let’s look at an example of a borrower with a $300,000 mortgage. The mortgage insurance could be $1,500 to $3,000 per year (of course, that’s in addition to the monthly mortgage payment, homeowner’s insurance, and property taxes).
As a very general guideline, Young’s team estimates typical buyers in their area might expect to pay between $50 and $200 monthly for mortgage insurance.
“It varies from lender to lender and borrower to borrower,” Padgett explains.
“Between half a percent and 1% percent of the loan is going to be the easiest average to keep in mind, but it can go lower or higher for sure.”
What factors into your mortgage insurance rate?
Here’s how these variables factor into your mortgage insurance rate:
- The size of the loan: Obviously, 1% or so of a larger loan corresponds to a larger monthly premium than it would for a smaller loan.
- Down payment amount: Mortgage insurance is required when the down payment is small in order to protect the lender. You won’t have to pay it if you put 20% down on a home.
- LTV: The cost of your mortgage insurance varies based on that loan-to-value ratio, or the amount of money a borrower owes on the mortgage compared to the home’s value.
- Your credit score: Borrowers with higher credit scores will have lower mortgage insurance rates.
- Your loan term: Shorter loan terms will have higher monthly insurance payments.
- How much coverage is being provided on the home: More coverage means higher payments.
How to estimate your mortgage insurance
It’s not easy to calculate mortgage insurance yourself, but it’s helpful to get a sense of your general range to guide your expectations.
So let’s say that a typical mortgage insurance rate ranges from 0.5% to 1%. To secure the home, you want to borrow $150,000. You’ll likely pay somewhere between $750 ($150,000 x 0.005%) and $1,500 ($150,000 x .01) every year in mortgage insurance.
Of course, if you’re putting more money down — closer to 20% — and you have a higher credit score, the rate will likely be a bit lower. Likewise, if you’re putting down less and have lower credit, your rate could be on the higher end — up to 2.25%.
To get a closer estimate based on your custom specs, try plugging your data into this online mortgage insurance calculator
When can you get rid of mortgage insurance?
You can get rid of mortgage insurance when you reach 20% equity (that is to say, when your mortgage balance reaches 80% of the original purchase price) by requesting the lender drop it. Otherwise, the lender is required to drop it automatically when you reach 22% equity, as long as you haven’t missed any of your scheduled payments and remain in good standing.
Keep an eye on these numbers, because the lender may keep the mortgage insurance on the books until the last possible moment.
“More often than not, it will fall off on its own, ” Padgett says but lenders are only required to remove it on conventional loans once you have reached 22% equity on the original appraised value.
She notes that you can take a proactive role in getting rid of mortgage insurance if you feel there’s a reason to make the case — for instance, if you do a substantial remodel or if the market dramatically lifts your home value over a short time.
“If you think that you’ve added value to the home, you can get the home appraised and argue the mortgage insurance at that point, when they find the new value of the home,” Padgett says.
The four main types of mortgage insurance
There are four main types of mortgage insurance, with different rules and payment structures. Let’s go through the basics as well as the pros and cons of each.
This is the most common type of mortgage insurance. It’s an additional monthly fee you pay with your mortgage payment until you reach 20% equity (or it will drop at 22% equity if you don’t request to remove the insurance).
You can include these payments with your monthly mortgage or pay them separately. The major pro here is that you don’t have to pay for mortgage insurance all at once. But the major con is that you’ll pay more each month.
Your lender takes care of the insurance in this type of mortgage insurance — sounds great, right?
Sure, your monthly payments could be lower than if you were paying for the MI out of pocket monthly, but the lender covers its costs for the MI by charging the borrower a higher interest rate, so you could be paying more over the life of the loan. Also, you can’t cancel lender-paid mortgage insurance when you gain equity in your home because this type is wrapped into your mortgage.
This is when you pay the entire premium upfront in one lump sum, either at closing, or the cost can be lumped into the mortgage. This keeps your monthly financial obligation lower, but you have to pay more in upfront costs. And because you’ve paid all at once right off the bat, there’s a chance you could lose money if you sell or refinance your home before reaching the 20% equity threshold. (No refunds on what you already paid for your single-premium mortgage insurance!)
This type of mortgage insurance might work for a borrower who expects to stay in the home for a long time.
With this (somewhat uncommon) hybrid model, you pay part of the premium upfront, and the rest monthly. Through this type of mortgage insurance, your monthly payments are lower than they would be with borrower paid, and you’ll pay less upfront than you would with single premium. Plus, you can cancel your portion when you gain more equity.
The seller may cover these costs for the borrower. But if they decide not to, it could be a better bet to just put more cash toward your down payment than toward these upfront mortgage insurance costs.
How to save money on mortgage insurance
As with most financial commitments, you might be able to save money on your mortgage insurance by shopping around for different lenders. By default, your lender will choose your insurer for you, but you may be able to choose which insurer covers your mortgage if your lender offers options.
In order to secure a better rate, you can also work to improve your credit score. And if possible, you can make a larger down payment on the home, thereby lowering the lender’s risk exposure and reducing (or eliminating) the need for mortgage insurance.
You might also consider a so-called piggyback second mortgage, also known as an 80/10/10 loan. Through this process, you are buying a house with two mortgages at the same time, with one covering 80% of the home price and the other covering 10%. Your down payment covers the last 10% of the purchase price. This option allows you to avoid mortgage insurance while only putting 10% down on the loan, but comes with its own set of pros and cons. .
Mortgage insurance might feel like an unnecessary expense, but a lot of buyers find it worth the cost to get their foot in the homeownership door. Talk to a qualified financial professional or loan originator to learn more about whether you’d need mortgage insurance and how to think about mortgage insurance and PMI rates.
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