Average Cost of Mortgage Insurance – How Much Should I Be Paying? | NextAdvisor with TIME

It may sound impossible given the hot real estate market of the last two years, but houses are expected to be even more expensive in 2022.

Home values ​​are set to rise another 11% this year, according to a Zillow forecast, putting even more pressure on would-be homeowners’ budgets. That means it will be even more important to understand and potentially reduce all of the costs associated with buying a home.

One of those costs could be private mortgage insurance. Known as PMI, this is a fee your lender might charge you based on the size of your down payment. PMI increases your monthly mortgage payments, so before you close on a loan, make sure you understand what PMI is, how much you’ll be charged, and whether it’s worth the cost.

how much does private mortgage insurance (pmi) cost?

When a borrower has less than 20% down, in the eyes of the lender, they are at greater risk of defaulting on the loan. private mortgage insurance (pmi) is about protecting the lender from that risk.

“It’s insurance that covers the lender’s risk if they can’t pay 20% on the property,” says Vicki Ide, vice president and manager of residential loans at Tompkins Vist Bank in Pennsylvania.

Lenders add PMI to your mortgage in exchange for accepting the higher risk of a smaller down payment. The additional fee acts as insurance for the lender in case he is unable to continue paying the mortgage.

The cost of PMI will depend on a few factors, including the amount of the loan and your credit score. Paid monthly or in a lump sum up front, you can generally expect PMI to cost between 0.58% and 1.86% of the loan amount based on Urban Institute Mortgage Insurance data. In dollars, Freddie Mac estimates this looks like $30 to $70 for every $100,000 added to a monthly mortgage payment.

“If you borrow more, they will charge you more,” says Michelle Petrowski, a certified financial planner in Phoenix.

Here’s an example of how that cost would break down:

on a $300,000 home with a 30-year fixed-rate mortgage:

In this example above, the loan with the 5% down payment required pmi. Based on a credit score between 700-719, this example borrower could expect to pay 0.99% of their loan amount: $2,821.5. If you divide this number by 12, you will get a monthly PMI payment of $235. The total cost of the PMI will reach $21,983 when the borrower reaches 20% equity in the home and the PMI payments are complete.

factors that affect the pmi

The amount of PMI you pay will vary by lender, but it also depends on your personal financial profile.

But credit score isn’t the only metric that PMI changes: It also takes into account loan amount, down payment amount, and mortgage type.

“It’s going to be individualized,” says ide. Make sure you understand how each of these factors affects PMI so you can make an informed cost decision before you get a mortgage.

down payment amount:

Your down payment is the key factor that determines whether you will pay PMI. If you put 20% or more down on your home purchase, you won’t have to pay any PMI. however, if you pay less than 20%, you can generally expect pmi.

ide says that the most important thing here is the loan-to-value ratio. For example, if you put a 15% down payment on your purchase, that’s an 85-15 ratio (meaning 85% mortgage, 15% down). That scenario could leave you paying less PMI than a 95:5 ratio (meaning 95% mortgage, 5% down).

loan size:

the size of the loan is one of the most important factors affecting pmi. That’s because the more money you borrow, the riskier it is for the lender if you default.

petrowski says each lender will have slightly different pmi brackets depending on the loan amount, but generally speaking, if you borrow more, you can expect to pay more.

credit score:

“The better your credit score, the better your [pmi] rate,” ide says.

Your credit score is an important metric for any type of financial transaction. it tells the lender how trustworthy you have been in the past and how risky you will be as a borrower.

A better credit score will generally mean lower PMI payments, according to Ide and Petrowski. For example, a credit score of 750 would likely place your PMI in the lower 0.58% range; a credit score lower than 600 could push the cost further toward 1.86%, the higher end of the range.

But again, each lender will calculate the cost slightly differently, say ide and petrowski.

type of mortgage:

Private mortgage insurance is often cheaper than conventional 30-year mortgages, says ide. Mortgage insurance may be higher with government-backed loans, such as FHA or USDA mortgages, where rates are set by the government.

Borrowers with lower credit scores can often be approved for government loans when they don’t qualify for private loans, which is another reason government loans can have a higher pmi.

“If you’re more in that kind of position, your money is a little tight and your score isn’t as good, that’s why more people are leaning more toward fha loans,” says ide.

pmi can also be higher on jumbo or construction loans, ide says, again because the risk on those mortgages tends to be higher.

Should I avoid private mortgage insurance?

Private mortgage insurance is a hotly debated topic in the world of personal finance. For one, accepting PMI allows you to move into a home with a lower, more affordable down payment. but on the other hand, it increases your monthly mortgage payment.

“People think it’s a waste of payment and that the extra they pay monthly doesn’t benefit them,” says ide. This argument suggests that PMI only helps the lender while increasing costs for the borrower.

however, pmi can open up access to homeownership for people who do not have a 20% down payment. and once a homeowner gets into a property, there’s always the chance to refinance later, rent a room in the house for passive income, or improve the house and get a great return on investment when they sell the house in no time later. date. Each situation is nuanced and specific to the individual, but some view PMI simply as a cost to a greater good.

so pmi is a good tool, says ide: “it makes some properties more affordable, and I don’t think it’s that expensive for what it is.”

Also, the PMI doesn’t last forever, according to Petrowski. it can be eliminated once you pay off enough of the mortgage to have at least 20% equity in the home.

“I don’t think it’s necessarily the dirty little secret to avoid,” says Petrowski. it all comes down to what matters most to you. If your goal is to own a home sooner rather than later, PMI might just be an option to get you there. For people who care strictly about numbers, choosing PMI might not make sense because it makes houses more expensive in the long run.

“If you’re really close to saving 20%, maybe it’s worth waiting a little longer and saving that extra money,” says Petrowski.