“What is mortgage insurance and how much does it cost” is probably the question running through your mind when you are planning to purchase a home. Mortgage insurance is an important aspect of the home buying process that protects the lender in case the borrower defaults on their loan.
Understanding what is the average cost of mortgage protection insurance and its purpose of mortgage insurance is essential for anyone looking to purchase a home. In this blog, we will be discussing the topic of “what is mortgage insurance and how much does it cost” in depth.
Whether you are a first-time home buyer or a seasoned homeowner, understanding the ins and outs of mortgage insurance is crucial. In the next paragraphs, we will be diving deeper into the topic of mortgage insurance and how it can impact your home-buying journey.
Understanding Mortgage Insurance
Mortgage Insurance
Mortgage insurance, also known as “mortgage protection insurance” or “private mortgage insurance,” is an insurance policy that protects a lender or property holder in the event that the borrower defaults on payments, passes away, or is otherwise unable to meet the contractual obligations of the mortgage.
This insurance can be in the form of private mortgage insurance (PMI), qualified mortgage insurance premium (MIP) insurance, or mortgage title insurance. These policies all aim to make the lender or property holder whole in the event of specific losses.
Mortgage Life Insurance
“Mortgage life insurance,” on the other hand, is designed to protect the borrower’s heirs if the borrower passes away while still owing mortgage payments. It may pay off either the lender or the heirs, depending on the terms of the policy.
“What insurance for a mortgage” refers to the various types of insurance that protect the lender or property holder in case of borrower default or death.
How Does Mortgage Insurance Work?
Mortgage insurance, such as private mortgage insurance (PMI), is an insurance policy that protects the lender in case the borrower defaults on the mortgage. It can be paid as a typical pay-as-you-go premium, or it can be capitalized into a lump-sum payment at the time of mortgage origination.
For homeowners who are required to have PMI because of the 80% loan-to-value ratio rule, they can request to have the insurance policy canceled once 20% of the principal balance has been paid off.
Here are three types of mortgage insurance:
Private Mortgage Insurance (PMI)
Private mortgage insurance (PMI) is a type of mortgage insurance that a borrower may be required to purchase as a condition of a conventional mortgage loan. The cost of PMI varies depending on the loan amount and the borrower’s credit score.
PMI protects the lender, not the borrower, in the event of default on the loan. The lender typically arranges for PMI coverage, which is provided by private insurance companies.
PMI is usually required if a borrower makes a down payment of less than 20% on a conventional loan or if a borrower is refinancing with a conventional loan and has less than 20% equity in the home. In such cases, the borrower must pay PMI insurance as part of their mortgage loan.
Qualified Mortgage Insurance Premium (MIP)
When obtaining a U.S. Federal Housing Administration (FHA)-backed mortgage, borrowers are required to pay for FHA mortgage insurance premiums (MIPs). These premiums provide a type of insurance similar to private mortgage insurance (PMI) for conventional loans.
However, unlike PMI, MIPs have different rules, including that all FHA mortgage borrowers must purchase this insurance regardless of the size of their down payment. MIP insurance is a mandatory requirement for all FHA mortgages to protect the lender in case of default.
Mortgage Title Insurance
Mortgage title insurance, also known as a mortgage title policy, protects the beneficiary, typically the lender, against loss in the event that a sale is later invalidated due to a problem with the title. The insurance protects against losses if it is determined that someone other than the seller owns the property at the time of sale.
Before mortgage closing, a representative, such as a lawyer or a title company employee, performs a title search to uncover any liens placed on the property that would prevent the owner from selling and to verify that the real estate being sold belongs to the seller.
Despite a thorough search, it’s possible to miss important pieces of evidence due to the decentralized nature of the information.
Mortgage Protection Life Insurance
Borrowers are often offered Mortgage Protection Life Insurance when applying for a mortgage. This type of insurance is designed to pay off the remaining mortgage balance in the event of the borrower’s death.
The borrower can choose to decline this insurance when it is offered, but they may be required to sign a series of forms and waivers verifying their decision and acknowledging the risks associated with having a mortgage.
The payouts for Mortgage Protection Life Insurance can be either declining-term, where the payout decreases as the mortgage balance decreases, or level, where the payout remains the same throughout the policy.
However, the latter option is usually more expensive. The recipient of the payments can be either the lender or the borrower’s heirs, depending on the terms of the policy.
Why Do You Need Mortgage Insurance?
Mortgage insurance may not be the first thing on a homebuyer’s mind, but it is an important consideration for protecting both the lender and the borrower. Despite being an additional cost, mortgage insurance can offer numerous benefits that may make it worth considering.
Here are 10 reasons why you may want to consider mortgage insurance:
1. Homeownership on Your Terms
Mortgage insurance provides you with a valuable safety net that can help you achieve your goal of homeownership. By offering you options to finance your home purchase, you can take advantage of the best rates and terms that fit your financial situation.
With the right preparation and resources, mortgage insurance can empower you to secure the home of your dreams and build a better future for you and your family.
2. Be Eligible for a Better Interest Rate
When you purchase a home, it can be challenging to come up with a large down payment. However, with mortgage insurance, you can still access the same low interest rates and flexible terms as those who have a larger down payment.
This way, you can enjoy the benefits of homeownership without sacrificing your financial stability.
3. More Down Payment Options
If you’re considering homeownership but struggling to come up with the down payment, mortgage insurance can help bridge the gap. With a range of options designed to help you achieve your goals, you can choose the solution that’s right for you.
From low down payment options to those for self-employed or commission-based workers, mortgage insurance provides you with a path to homeownership.
4. Buy Instead of Renting
Renting can be a good option, but it can also limit your freedom to make your living space truly yours. By taking advantage of mortgage insurance, you can enjoy the stability and independence of homeownership without worrying about the cost.
With similar monthly carrying costs to your rent, you can make your home a reflection of your personality and your style.
5. Overcome Barriers to Financing
Homeownership is an excellent way to build wealth, and mortgage insurance provides you with the opportunity to take advantage of this even if you don’t meet conventional lending criteria. For those with good credit who may have struggled to qualify for a mortgage in the past, mortgage insurance can help open the door to a more secure financial future.
6. Own and Enjoy a Vacation Property
If you’re looking to buy a vacation property or second home, mortgage insurance can help you make it happen. With options tailored to suit your needs, you can enjoy the benefits of owning a home away from home without sacrificing your financial stability.
7. Get Money Back
When you purchase an energy-efficient home or make energy-saving renovations to your existing property, you can enjoy even more benefits with mortgage insurance. With a 10% refund on your mortgage insurance premium, you can reduce your costs and enjoy a more sustainable and cost-effective home.
8. Save on Household Purchases
When buying your first home, expenses can quickly add up, but with mortgage insurance, you can enjoy savings on many of the costs associated with homeownership. From appliances and truck rentals to home-improvement materials and moving supplies, mortgage insurance can help you keep your expenses low and your wallet happy.
9. Take it With You When You Move
If you’re looking to move in the future, mortgage insurance can be a valuable asset. With a portable mortgage, you can transfer the terms of your loan to a new property, saving you money on premiums and keeping your home financing flexible.
10. Get Help When You Need It
Life is unpredictable, and financial difficulties can arise when you least expect them. But with mortgage insurance, you can have peace of mind knowing that you’ll have the support you need to keep your home.
From job loss and serious illness to marriage breakups, a Premier Mortgage Professional can help you get the help you need to stay in your home and maintain your financial stability.
Why Should You Not Get Mortgage Insurance
- Mortgage insurance policies not only decrease in benefit as the loan decreases, but also the coverage amount can become insufficient in the event of a significant financial change or unexpected expense, such as a major health issue or job loss.
- The cost of the premium does not decrease over time, which can result in a long-term financial burden for homeowners who keep the policy for the entire length of their mortgage. This can result in a significant amount of money being spent on insurance premiums over the life of the loan, without providing the necessary coverage in the event of a claim.
- The requirement to use the money from the policy to pay off the mortgage can limit the homeowner’s financial flexibility and options in the event of a claim. It might make more sense to use the money for other expenses such as medical bills, living expenses or debt repayment.
- Although mortgage insurance protects the lender in the event of default, it does not provide the homeowner with any protection or financial assistance in the event of a hardship. This can result in the homeowner facing financial difficulties, such as losing their home, without any support.
- Compared to life insurance, mortgage insurance can be much more expensive and does not provide the same level of protection or benefits for the homeowner.
- The lack of portability for mortgage insurance means that homeowners who switch lenders will need to take out a new policy, which can be a complicated and time-consuming process. This can also result in higher premiums or the need to provide additional information and documentation.
- The use of post claim underwriting in mortgage insurance can result in a denial of benefits in the event of a claim. This can occur if a pre-existing health condition was not disclosed at the time of signing the policy, which can be a significant financial burden for the homeowner.
- Renewing the mortgage insurance policy every 5-10 years, depending on the term, can result in higher premiums due to newly developed health problems or aging. This can make it difficult for homeowners to budget and plan for the long-term, as the cost of insurance premiums can increase unexpectedly.
How Long Do You Need to Have Mortgage Insurance?
The good news about Private Mortgage Insurance (PMI) is that in many cases, you can eventually get rid of it, meaning you won’t have to continue paying for it for the entire duration of your home loan.
This is because most mortgage insurance plans have provisions that allow you to cancel your policy once you have reached a certain level of equity in your home. This equity is typically achieved once you have paid off more than 20% of the full loan amount.
In most cases, your lender will remove PMI from your mortgage once you have reached a 22% equity level. This means that you have paid off 22% of the original loan amount and now have 22% equity in your home.
To avoid paying unnecessary PMI premiums, it’s a good idea to keep an eye on your mortgage balance and find out when you’ll reach the 20% benchmark so you can request a PMI cancellation.
It’s important to note that some mortgage insurance types require upfront payments that are refundable when your mortgage insurance is canceled. This means that you may have made an initial payment when you took out the loan, but you can get that money back if you reach the point where you no longer need PMI.
This is another reason why it’s important to keep track of your mortgage balance and equity level so you can take advantage of these provisions and save money on your mortgage over time.
Average Cost of Private Mortgage Insurance and Mortgage Protection Insurance
The cost of private mortgage insurance (PMI) and mortgage protection insurance (MPI) varies among lenders and depends on factors such as:
- loan amount
- credit score
- loan-to-value ratio (LTV)
- loan terms.
According to data from the Urban Institute, the average range for PMI/MPI rates is 0.5% to 1.86% of the loan’s original amount. Based on an estimated PMI/MPI insurance rate of 0.51%, Freddie Mac estimates that homebuyers pay around $30 to $70 per month per $100,000 borrowed.
However, these costs can vary depending on factors such as LTV ratio and credit score. For example, a homebuyer with a high credit score (above 760) may pay around $1,241 per month for PMI/MPI, while someone with a lower score (between 620-639) may pay $363 more per month.
Overall, the cost of PMI/MPI can be a significant factor to consider when buying a home.
Reducing and Eliminating PMI
There are various ways to eliminate PMI. One option is to consider the type of loan you have. Veterans may qualify for a VA loan, which does not require PMI. FHA loans, on the other hand, require PMI for the life of the loan, as they are often the only option for borrowers with lower credit scores and down payments.
To eliminate PMI on an FHA loan, you can work on improving your credit and building equity, then refinance with a conventional loan.
Another way to reduce or eliminate the need for PMI (Private Mortgage Insurance) is by increasing the down payment on a home. A larger down payment can lower the loan-to-value ratio, which in turn can lower the cost or eliminate the need for PMI.
Another option to consider is a piggyback loan. This is the second loan taken out in addition to the primary mortgage loan. The piggyback loan can be used to cover the down payment and may allow borrowers to avoid PMI altogether.
It’s important to note that while these options may help reduce or eliminate the need for PMI, they may also come with their own set of fees and costs. It’s essential to carefully weigh the pros and cons of each option and consider which one may be the best fit for your financial situation.
Additionally, it’s worth looking into the possibility of lender-paid mortgage insurance, which can sometimes be included in the mortgage rate. It is a great way to reduce the initial costs of buying a home but increases the overall cost of the loan.
An In-Depth Look at “What is Mortgage Insurance and How Much Does it Cost
Mortgage insurance is a necessary aspect of the home-buying process that protects the lender in case of default.
Understanding the cost and purpose of mortgage insurance is essential for anyone looking to purchase a home. It is important to research and consider all options, including Private Mortgage Insurance (PMI), in order to make informed decisions about your mortgage and insurance.
By understanding the ins and outs of mortgage insurance, you can make the best decision for your individual situation. Overall, mortgage insurance is an important consideration when taking out a mortgage and should be considered as part of your overall financial plan.
