According to experts in the real estate industry, mortgage insurance is an essential safeguard for anyone purchasing a new home. But what exactly is mortgage insurance, and how does it work? The simple answer is that it is an insurance policy that protects lenders, allowing them to take on the risks of lending to a borrower with a smaller down payment. And, of course, it comes at a price: so just how much does mortgage insurance usually cost?
The cost of mortgage insurance can vary depending on several factors, including the amount of your loan and your credit score. However, a rough estimate is that it can range from 0.55% to 2.25% of the value of your home per year. This may not seem like a lot, but when added up over the course of 30 years, it can amount to a significant sum. So, it’s incredibly crucial to understand the details of the policy and how it will impact your monthly mortgage payments.
While the cost of mortgage insurance may seem daunting, it is a necessary expense for the majority of homebuyers. However, it is essential to do your research and shop around to find the best rate and coverage for your specific needs. By investing the time and effort to understand the ins and outs of mortgage insurance, you’ll be able to make a more informed decision and ensure that you’re getting the best deal possible.
Factors that affect the cost of mortgage insurance
Mortgage insurance is an essential policy that protects the lender from loss if the borrower defaults on the mortgage. It is a type of insurance that can be required if the borrower puts down less than 20% of the home’s purchase price as a down payment. The cost of mortgage insurance varies depending on several factors. Here are the factors that can affect the cost of mortgage insurance.
- Credit Score: If you have a good credit score, your mortgage insurance premium will be lower. On the contrary, if your credit score falls below 620, you may not qualify for mortgage insurance, or the premiums may be higher.
- Down Payment Amount: The more money you put down, the lower the mortgage insurance premiums. If you can afford to put down at least 20% of the purchase price, you may not be required to take out mortgage insurance.
- Loan-to-Value (LTV) Ratio: The LTV Ratio measures the amount of the loan compared to the value of the property. The higher the LTV ratio, the higher the mortgage insurance premiums will be.
Aside from the three factors mentioned above, there are other factors that can affect the cost of mortgage insurance. These factors include the type of property, the size of the loan, the interest rate, and the length of the loan.
Below is a table that shows how credit score and down payment amount can affect the cost of mortgage insurance:
| Credit Score | Down Payment Amount | Monthly PMI on $200,000 mortgage |
|---|---|---|
| 760+ | 10% or more | $67 |
| 760+ | Less than 10% | $95 |
| 700-759 | 10% or more | $79 |
| 700-759 | Less than 10% | $135 |
| 680-699 | 10% or more | $90 |
| 680-699 | Less than 10% | $165 |
| 660-679 | 10% or more | $109 |
| 660-679 | Less than 10% | $200 |
| 640-659 | 10% or more | $135 |
| 640-659 | Less than 10% | $245 |
| Below 640 | 10% or more | N/A |
| Below 640 | Less than 10% | N/A |
As you can see in the table, the lower your credit score and the less money you put down, the higher your monthly mortgage insurance premium will be.
Frequently Asked Questions about Mortgage Insurance Costs
Q: What is mortgage insurance and why do I need it?
A: Mortgage insurance is a type of insurance that protects your lender if you default on your mortgage payments. It is typically required for homebuyers who have less than 20% of the home’s purchase price as a down payment.
Q: How much does mortgage insurance usually cost?
A: The cost of mortgage insurance can vary depending on factors such as the size of your down payment, the type of mortgage you choose, and your credit score. On average, mortgage insurance can cost anywhere from 0.3% to 1.5% of your loan amount annually.
Q: Can I avoid paying mortgage insurance?
A: Yes, if you have a down payment of at least 20% of the home’s purchase price, you can avoid paying mortgage insurance. Additionally, some lenders may offer programs that allow you to take out a second loan to cover the down payment and avoid mortgage insurance.
Q: Is mortgage insurance tax deductible?
A: Yes, if your income is below a certain threshold, you may be able to deduct your mortgage insurance premiums from your taxes. This deduction is set to expire in 2021, but it is possible that it may be extended.
Thank You for Learning About Mortgage Insurance Costs
Now that you know more about the cost of mortgage insurance, you can make informed decisions when it comes to buying a home. Remember, having a larger down payment is the best way to avoid paying mortgage insurance, but it’s not always feasible for everyone. If you have any further questions about mortgage insurance or homebuying in general, don’t hesitate to reach out. Thank you for reading and we hope to see you again soon!