Mortgages Explained: How Much Will I Pay in Mortgage Insurance?

by Mortgage Nerd on November 16, 2011 · 0 comments

Mortgage insurance, unlike home owners insurance, is a necessary evil for most mortgage programs when you have less than 20% equity or down payment. It’s true that some lenders, that don’t work with Fannie Mae or Freddie Mac, don’t require any mortgage insurance but those lenders usually offer higher interest rates to compensate. If you found this article, it’s likely that you would like to know how much you will pay in mortgage insurance with your monthly mortgage payments. Well then, let me educate you!…

Mortgage Insurance with FHA Loans

By a long shot, FHA has the most expensive monthly mortgage insurance. As of the date of this article FHA requires an annual premium of 1.15% for loans with a LTV (loan to value) of 95% or greater and 1.1% for loans less than 95% LTV. This means that you will pay $9.58 per month for every $10,000 borrowed. On a $200,000 loan that is a whopping $191.60 per month.  Not only that but you will pay that mortgage insurance for a minimum of 5 years, even if you have 20% down payment. This is why FHA loans are usually reserved for those people that can’t qualify for a Conventional mortgage loan.

Important Note:  The mortgage insurance rates on FHA 15 year loans are significantly cheaper.

Mortgage Insurance with USDA Rural Housing Loans

For the longest time USDA Rural Housing loans didn’t charge a monthly mortgage insurance, until October 1st of 2011. Now, USDA charges an annual premium of .3%.  It’s almost a quarter of what you will pay for FHA mortgage insurance but it’s still a bummer because it didn’t use to exist. For every $10,000 borrowed, you will pay monthly mortgage insurance of $2.50. They also still charge an upfront “funding fee” of 1%, just like FHA.

Very Important Note: The mortgage insurance with USDA loans is for the life of the loan! You will never stop paying it unless you pay off the entire mortgage, even if you get to 20%, 50%, or 99% equity.

Mortgage Insurance for Conventional Loans

Not as cheap as USDA mortgage insurance but at least with Conventional mortgages they use some common sense and give you a rate based on your credit score and loan to value.  For example, somebody with a 740 credit score and 15% down payment is going to have a much cheaper rate than somebody with 5% down and a 700 credit score. To me this makes a lot of sense and is the way it should be with every mortgage insurance program.

Here are a couple examples of Conventional mortgage insurance rates…

For a loan transaction with 5% equity or down payment and 740 or higher credit score the annual premium will be anywhere from .77 to .94% (depends on the private mortgage insurance company). Because rates do differ between PMI companies you will want to make sure that your loan officer has the ability to shop around for you.

Somebody with 10% down and a 700 credit score will pay anywhere between .64% and .85% in annual premiums.

Single Premium Mortgage Insurance: The Mortgage Insurance Buy-Out

This is one of my favorite mortgage insurance options for borrowers getting a Conventional loan and it can make a lot of sense for somebody that is going to keep their loan for at least a couple of years. With this option you can pay a one-time buy out fee as part of your upfront closing costs and not have to pay any monthly mortgage insurance.  The beautiful thing about it is that you can finance the fee. For example, somebody with 5% down and a 760 credit score could pay a fee of 1.95% of the loan amount to buy out of monthly mortgage insurance.

On a loan amount of $100,000 that is a fee of $1,950. If you choose to finance it, it would make your full loan amount $101,950.  This raises your monthly payments by several dollars instead of the $80 or so dollars with monthly mortgage insurance that could take 7 to 10 years to get rid of (assuming you make minimum payments).

Conclusion

Mortgage insurance is one of the variables that few people take into consideration when they are choosing their mortgage. In my opinion, it is one of the biggest variables that you should take into consideration.  Right now, because of the great options that Conventional Loans offer for mortgage insurance and the high level of mortgage insurance that FHA is charging, if you can qualify for a Conventional loan than it is a no-brainer.

 

 

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