How Much Is Mortgage Insurance?

When you are considering purchasing a new home or refinancing your current mortgage, it is important to understand how mortgage insurance works and how much it will cost you. Mortgage insurance is typically required by lenders when borrowers put less than 20% down on a home, and it protects the lender in case the borrower is unable to make their mortgage payments. In this article, we will discuss how mortgage insurance works, how much it typically costs, and some frequently asked questions about mortgage insurance.

What Is Mortgage Insurance?

Mortgage insurance is a type of insurance that protects the lender in case the borrower defaults on their loan. This insurance is typically required by lenders when the borrower puts less than 20% down on a home. The purpose of mortgage insurance is to reduce the risk to the lender and make it easier for borrowers to obtain a mortgage. There are two types of mortgage insurance: private mortgage insurance (PMI) and mortgage insurance premium (MIP).

Private Mortgage Insurance (PMI)

Private mortgage insurance (PMI) is a type of mortgage insurance that is required by lenders when borrowers put less than 20% down on a home. PMI is typically provided by private mortgage insurance companies and is paid for by the borrower as a monthly premium. The cost of PMI can vary depending on the size of the down payment, the loan amount, and the credit score of the borrower.

The cost of PMI can range from 0.3% to 1.5% of the original loan amount per year. For example, if you are borrowing $200,000 and your PMI rate is 1%, you would pay $2,000 per year, or $166.67 per month, for PMI.

Mortgage Insurance Premium (MIP)

Mortgage insurance premium (MIP) is a type of mortgage insurance that is required by the Federal Housing Administration (FHA) for all FHA loans. MIP is paid for by the borrower as a monthly premium and is used to protect the lender in case the borrower defaults on their loan. The cost of MIP can vary depending on the size of the down payment, the loan amount, and the term of the loan.

The cost of MIP for most FHA loans is 0.85% of the loan amount per year for the life of the loan. For example, if you are borrowing $200,000 with an FHA loan, you would pay $1,700 per year, or $141.67 per month, for MIP.

How Is Mortgage Insurance Calculated?

The cost of mortgage insurance is typically calculated based on the size of the down payment, the loan amount, and the credit score of the borrower. In general, the larger the down payment and the higher the credit score, the lower the cost of mortgage insurance. The cost of mortgage insurance is typically expressed as a percentage of the original loan amount per year.

For example, if you are borrowing $200,000 with a 5% down payment and a credit score of 700, your PMI rate might be 0.5%. This would mean that you would pay $1,000 per year, or $83.33 per month, for PMI.

Is Mortgage Insurance Tax Deductible?

From 2007 to 2020, mortgage insurance was tax deductible for borrowers who met certain criteria. However, this tax deduction was not extended beyond 2020. Currently, mortgage insurance is not tax deductible.

How Can I Avoid Mortgage Insurance?

If you want to avoid paying mortgage insurance, there are a few options:

• Put down at least 20% on your home
• Obtain a VA loan if you are a veteran or active-duty military member
• Obtain a USDA loan if you are purchasing a home in a rural area

If you are unable to avoid paying mortgage insurance, it is important to factor the cost of mortgage insurance into your monthly mortgage payment and budget accordingly.

FAQ

What is mortgage insurance?

Mortgage insurance is a type of insurance that protects the lender in case the borrower defaults on their loan.

When is mortgage insurance required?

Mortgage insurance is typically required by lenders when borrowers put less than 20% down on a home.

How much does mortgage insurance cost?

The cost of mortgage insurance can vary depending on the size of the down payment, the loan amount, and the credit score of the borrower. The cost of mortgage insurance is typically expressed as a percentage of the original loan amount per year.

Can I avoid paying mortgage insurance?

If you want to avoid paying mortgage insurance, you can put down at least 20% on your home, obtain a VA loan if you are a veteran or active-duty military member, or obtain a USDA loan if you are purchasing a home in a rural area.

Is mortgage insurance tax deductible?

From 2007 to 2020, mortgage insurance was tax deductible for borrowers who met certain criteria. However, this tax deduction was not extended beyond 2020. Currently, mortgage insurance is not tax deductible.

Conclusion

Mortgage insurance is an important part of the home buying process for many borrowers. Understanding how mortgage insurance works and how much it will cost you can help you make informed decisions about your mortgage. If you have any questions about mortgage insurance, be sure to speak with your lender or a qualified financial professional.