How much is mortgage insurance?

For many homebuyers, mortgage insurance is a necessary piece of the homeownership puzzle.

The question “How much is mortgage insurance?” has many answers. This post will look at the question in the following ways.

• Private Mortgage Insurance (PMI)
  PMI generally applies to conventional/conforming mortgage loans with less than 20% down payments.
  • PMI paid monthly as part of your house payment.
  • PMI paid upfront when you close on your home.
  • PMI paid upfront by the lender when you close on your home.
• Mortgage Insurance Premiums (MIP)
  MIP applies to FHA and USDA government loan programs.
  • FHA and USDA MIP are paid monthly as part of your house payment.
• Upfront MIP, Guarantee, and Funding Fees
  • FHA Upfront MIP is a one-time lump sum included in your loan amount when you close on your home.
  • USDA Guarantee Fee is also a one-time lump sum included in your USDA loan at closing.
  • VA Funding Fee is a one-time lump sum included in most VA loans when you close on your home.

Private Mortgage Insurance (PMI)

When you buy a home, lenders prefer your down payment to be a substantial amount of the purchase price. While it is true lenders might make more money from interest if they let you borromore, there is risk to the lender if the homeowner does not have adequate funds invested into the transaction.

Conventional mortgage loans typically prefer a down payment of 20% of the home’s purchase price. 20% is a significant amount. For example, a $300,000 price tag would require a $60,000 down payment. It could take decades for a young family to save $60,000. This is where PMI comes in.

Buying a home with a conventional mortgage loan with as little as a 3% down payment is possible because of PMI. PMI is an insurance policy the lender obtains on the portion of your mortgage that is greater than their preferred 80% loan-to-value (LTV).

You typically have three PMI options when using a conventional loan to buy your home.

Monthly PMI

Perhaps the most common way to pay PMI is monthly as part of your house payment. Now, the original question and title of this post is: exactly how much is mortgage insurance?. Unfortunately, there is no concrete answer when dealing with PMI on a conventional loan.

”P” in PMI is “private”, which means private (non-government) insurance companies provide the lender’s coverage and thus determine the cost. Several factors can determine what PMI rate is applied to a given mortgage loan, including:

• LTV
• Loan amount
• Loan term
• Location
• Credit score
• Property type

The range of rates can be significant. High credit borrowers with closer to 20% down payments will pay lower rates than lower credit scores with smaller down payments. Most rates fall somewhere between 0.3% to 2.0% of the loan amount annually.

Here’s how that works:

Looking at the same $300,000 purchase price, only this time the down payment is 5%. Instead of needing $60,000 to buy the house, we now need just $15,000. However, we’ll have to pay PMI.

These are rough numbers, but in our hypothetical example, the PMI rate might be 1%. 1% of our $285,000 loan amount is $2,850 the first year. Divided into 12 monthly payments, our PMI payment is $237.50. This is an oversimplified example, but it illustrates how monthly PMI works. Your lender will provide a monthly PMI quote once they have a completed application. All factors listed previously must be considered before your monthly PMI rate can be determined.

Single Payment PMI

What if you don’t want the extra PMI payment added to your loan? What if you have a house payment in mind and the PMI payment will cause your payment to exceed what you are comfortable with? Enter Single Pay PMI.

Single payment PMI is exactly what it sounds like. The homebuyer pays the PMI premium upfront (at closing) and never pays it again. Single pay premiums are typically higher than monthly PMI premiums, but since you only pay it once, single pay will typically be less expensive in the long run.

Single payment PMI uses the same factors when determining the rate charged as monthly PMI. The rates can be as low as 0.5% and as much as 4.0% or higher. Again, your lender can provide a quote once they have a complete picture of your situation. Using our same example from monthly PMI, a single pay rate of 2.5% would result in a single payment PMI premium of $7,125.

Lender Paid PMI

Ok, what if you don’t want to pay monthly PMI and you do not have the extra cash it would take to purchase single payment PMI? The lender can pay that single payment PMI for you!

Lender paid PMI is a single payment PMI premium paid at closing by the lender, not the homebuyer. How can this be, you ask? Lenders do this by increasing the interest rate on your loan to offset the cost of the mortgage insurance premium. Like our other examples, the rate is determined by your loan characteristics, so the amount your interest rate increases can vary. It’s not uncommon for the interest rate with lender paid PMI to be 0.25%-0.5% higher than the same loan with an alternate form of PMI.

As we’ve learned, the cost of mortgage insurance is not an easy question to answer, especially when dealing with conventional loans with varying loan characteristics. Fortunately, the government loan programs (FHA, USDA, VA) are much easier to understand.

Government Loan Insurance

The government loan programs exist to make the path to homeownership more attainable for more people. Each program is set up differently, so the ways their fees and mortgage insurance apply vary, too.

Government loans collect premiums in two ways. FHA and USDA collect annual premiums monthly as part of your house payment. FHA, USDA, and VA all collect some type of premium upfront as a one-time fee.

The easiest to understand is the upfront.

Upfront MIP and Guarantee and Funding Fees

FHA Upfront MIP (UFMIP)

FHA’s upfront MIP is simple. All FHA purchase loans have a 1.75% premium added to the base loan amount at closing.

Example:
$300,000 purchase price
$10,500 down payment (3.5%)
$289,500 base loan amount
$5,066 UFMIP (289,500 x 1.75%)
$294,566 FHA loan amount

Our FHA loan calculator easily handles all FHA loan calculations.

USDA Guarantee Fee

The USDA guarantee fee works similarly to the upfront FHA premium. The rate is 1% and applies to itself, too. It’s confusing, but the effect is you pay 1% of the loan amount and then another 1% of the fee that was just applied.

Example:
$300,000 purchase price and base loan amount
$3,000 guarantee fee (1%)
$30 added to the original guarantee fee (1% of $3,000)
$3,030 guarantee fee
$303,030 USDA loan amount

Yes, our USDA loan calculator does the work for you.

VA Funding Fee

VA loans typically include a funding fee. There are several ways in which the VA funding fee is applied. Fortunately, we’ve dedicated a whole page and calculator to the VA funding fee. Additionally, our va loan calculator also accounts for all VA funding fee scenarios.

Mortgage Insurance Premiums (MIP)

FHA and USDA loans also contain annual mortgage insurance premiums paid to the respective administration through the homeowner’s monthly payment. These MIP payments work similarly to conventional monthly PMI.

FHA MIP

In most cases the annual FHA MIP rate is 0.85% of the average FHA loan balance over the next 12 months. As of this writing, our FHA calculator is the only online FHA mortgage calculator that we know of that properly accounts for the way FHA calculates this premium. FHA mortgage insurance premiums can vary depending on loan term and down payment.

USDA MIP

USDA MIP works exactly like FHA MIP. However, since USDA loans are 30-year terms with no down payment, the rate of 0.35% is always the same. Like our FHA calculator, our USDA loan calculator accurately computes the annual premium into your monthly payment. Using our $300,000 example, the USDA portion of your monthly payment would be $88.

Determining how much mortgage insurance is can be complicated. This post can be used as a guide, and our mortgage calculators handle most of the heavy lifting for you. However, there is no substitute for a quality loan officer who can walk you through your options. We always recommend getting preapproved to explore your options before beginning your home search.