Depending on the size of your down payment or the amount of equity in your home, you may have to pay for mortgage insurance. This additional cost will increase your monthly payment. Let’s take a closer look at what private mortgage insurance, or PMI, is, how long you’ll have to pay for it, how it’s calculated, and how it can be avoided.
What is Private Mortgage Insurance?
Mortgage insurance protects your loan’s investor against the default of your loan. By mitigating this risk, your investor can allow smaller down payments toward the purchase of a home. This type of insurance is required when less than 20% of the purchase price is put down. The premium for this insurance policy can be rolled into you monthly mortgage payment or paid in a single payment upfront.
What are the Different Types of Mortgage Insurance?
There are three different types of mortgage insurance. 1 - Lender-paid mortgage insurance (LPMI) is a policy where your lender initially pays for your mortgage insurance. This will result in a higher interest rate that compensates your lender for that payment. LPMI cannot be canceled because the total is built into the balance of your loan. 2 - Borrower-paid mortgage insurance (BPMI) is the most common type of mortgage insurance. You can pay this amount as a part of your monthly mortgage payment or by making a single payment upfront. If you choose to pay the mortgage insurance monthly, you may cancel the insurance once you have paid down more than 20% of your home’s value. For a single-family home, this opportunity occurs when you reach a 78% LTV ratio, or the midpoint of your mortgage term. If you choose to pay the mortgage insurance up front in a single payment, there is no cancellation. 3 - Lastly, for FHA loans, a mortgage insurance premium (MIP) is required. This cost includes a UFMIP, or upfront mortgage insurance premium, typically 1.75% of your loan amount. Additionally, you will pay an annual mortgage insurance premium that will be based on a percentage of your loan amount. This amount is paid for the life of the loan.
How is the Cost of Your Mortgage Insurance Payment Determined?
On average, PMI costs between .22% to 2.25% of your mortgage balance. There are a few factors that contribute to the amount you pay in mortgage insurance. Credit score, term of your mortgage, debt to income ratio and loan to value ratio (the amount you borrow compared to the home’s value) all affect the cost of private mortgage insurance.
How Can You Avoid Paying PMI?
For conventional loans, PMI can be avoided by making a 20% or larger down payment. It can also be canceled by establishing a 78% LTV (loan to value) ratio. For an FHA mortgage, a 10% down payment can end your MIP after 11 years. Refinancing your home once you’ve built enough equity may also allow you to avoid these additional insurance payments.
Mortgage insurance is just one of the many factors that you need to consider when purchasing or refinancing a home. The right mortgage loan officer can help you to make the best decision and find the loan that meets your needs. For over 90 years the expert staff at Standard Mortgage (NMLS#:44912) have been helping home buyers and homeowners.