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Shopping for a home loan? Will your down payment be less than 20% of the home value? If you answered yes to both of these questions, there’s a good chance you’ll have to pay for private mortgage insurance. And that will increase the size of your monthly payments.
The question is, how much will it cost you? We set out to answer this question by analyzing current pricing trends across the U.S. Here’s what you need to know.
Long story short: In a hurry? Here’s the gist of this story in 100 words or less. When borrowers make a down payment below 20% of the purchase price, they usually have to pay for private mortgage insurance or PMI. There are some exceptions to this rule, such as the 80-10-10 “piggyback” loan and other specialized programs. But in most cases, a down payment below 20% brings the added cost of PMI. In 2014, the cost of private mortgage insurance ranges from 0.3% to 1.15% of the base loan amount, on average. This could increase your monthly payments anywhere from $50 to more than $100 a month.
What Is PMI, and Why Do I Have to Pay it?
Certain borrowers are required to pay for mortgage insurance (MI) on their home loans. This is an added cost that gets rolled into the loan and therefore increases the size of the monthly payments.
Generally speaking, mortgage insurance is required whenever the loan-to-value (LTV) ratio is more than 80%. In other words, it’s required when a single loan accounts for more than 80% of the appraised property value. This is why so many borrowers aim for a down payment of 20% — it allows them to avoid the extra cost of mortgage insurance entirely. These policies protect the lender, by the way. They do not protect the borrower.
Mortgage insurance comes in two “flavors” based on the type of loan:
- Private mortgage insurance, or PMI, is applied to conventional home loans with an LTV ratio above 80%.
- Mortgage insurance, or MI, is required for all government-insured FHA loans (which allow for an LTV ratio of up to 96.5%).
The bottom line is this. If your loan accounts for more
than 80% of the property value, as determined by an appraiser, you will probably have to pay some form of insurance in order to close. Which brings us to the next question: How much does PMI cost in 2014, on average?
How Much Is Mortgage Insurance in 2014?
The cost of mortgage insurance partly depends on the type of loan you are using. As mentioned above, there are two basic types of coverage. Private mortgage insurance (PMI) policies are applied to conventional home loans. Conventional or “regular” loans are not insured by the federal government. Borrowers who use government-insured FHA loans must also pay for mortgage insurance, but it’s different from PMI — it is provided through the federal government.
How much is private mortgage insurance, on average. PMI fees are generally expressed as a percentage of the loan amount. They can range from about 0.3% to 1.15% of the amount being borrowed. This is the amount you pay each year. (Example: a $300,000 home loan with an annual insurance rate of 0.5% would have $1,500 added onto it every year. Monthly, this would come out to an extra $125 per mortgage payment.)
The cost of FHA mortgage insurance is a bit more complicated. FHA loans actually require two types of mortgage insurance premiums (MIPs), annual and upfront. Here’s the difference between them, in terms of cost:
- The upfront premium is currently set at 1.75% of the base loan amount. (Example: an FHA loan of $300,000 loan would have an upfront MIP of $5,250.) This rate applies to all borrowers, regardless of the loan size or LTV ratio.
- The annual mortgage insurance premium on FHA loans will vary based on the size of the loan and LTV ratio. In most cases, the annual MIP ranges from 0.45% to 1.55% of the base loan amount.
In 2013, a new rule took effect that essentially increases the total cost of mortgage insurance on FHA loans. Some FHA borrowers will have to pay their annual MIP for the entire term of the loan, up to 30 years. Another rule increased the annual MIPs for all loans generated after April 1, 2013. The two tables below show the current annual MIP amounts for FHA-insured home loans in 2014.