mortgage insurance

How Much Mortgage Insurance Do I Need?

Mortgage insurance is a type of insurance that protects the lender in case the borrower defaults on their mortgage loan. It is typically required for borrowers who make a down payment of less than 20% of the purchase price of the home.

The amount of mortgage insurance you need will depend on a number of factors, including your loan-to-value (LTV) ratio, your credit score, the loan amount, and the type of loan you are getting.

Factors Determining Mortgage Insurance Amount

Loan-to-Value (LTV) Ratio

The LTV ratio is the ratio of the loan amount to the appraised value of the home. Lenders typically require mortgage insurance for LTV ratios above 80%.

• For example, if you are buying a home for $200,000 and you make a down payment of $20,000, your LTV ratio would be 90% ($180,000 / $200,000).
• In this case, you would be required to pay mortgage insurance.

Credit Score

Your credit score is a measure of your creditworthiness. Lenders use your credit score to determine the interest rate you will be charged on your mortgage loan.

• Borrowers with higher credit scores typically qualify for lower mortgage insurance premiums.
• For example, a borrower with a credit score of 720 may pay a PMI premium of 0.5% of the loan amount, while a borrower with a credit score of 620 may pay a PMI premium of 1% of the loan amount.

Loan Amount

The loan amount is the amount of money you are borrowing to purchase the home.

• The larger the loan amount, the higher the mortgage insurance premium will be.
• For example, a borrower who is borrowing $200,000 may pay a PMI premium of $1,000 per year, while a borrower who is borrowing $300,000 may pay a PMI premium of $1,500 per year.

Loan Type

The type of loan you are getting can also affect the amount of mortgage insurance you need.

• Conventional loans typically require mortgage insurance for LTV ratios above 80%.
• Government-backed loans, such as FHA loans, VA loans, and USDA loans, have different mortgage insurance requirements.

Calculating Mortgage Insurance

Private Mortgage Insurance (PMI)

PMI is the most common type of mortgage insurance. It is typically required for conventional loans with LTV ratios above 80%.

The PMI premium is calculated as a percentage of the loan amount. The premium rate varies depending on the LTV ratio and the borrower's credit score.

PMI premium = Loan amount x LTV ratio x PMI rate

• For example, a borrower who is borrowing $200,000 with an LTV ratio of 90% and a PMI rate of 0.5% would pay a PMI premium of $1,000 per year.

Federal Housing Administration (FHA) Mortgage Insurance

FHA loans are government-backed loans that are available to borrowers with lower credit scores and smaller down payments.

The FHA mortgage insurance premium is calculated as a percentage of the loan amount. The premium rate varies depending on the loan amount and the borrower's credit score.

FHA mortgage insurance premium = Loan amount x FHA mortgage insurance rate

• For example, a borrower who is borrowing $200,000 with an FHA loan would pay an FHA mortgage insurance premium of $1,225 per year.

Veterans Affairs (VA) Mortgage Insurance

VA loans are government-backed loans that are available to veterans and active-duty military members.

The VA mortgage insurance premium is calculated as a percentage of the loan amount. The premium rate is the same for all borrowers, regardless of their credit score.

VA mortgage insurance premium = Loan amount x VA mortgage insurance rate

• For example, a borrower who is borrowing $200,000 with a VA loan would pay a VA mortgage insurance premium of $2,150 per year.

United States Department Of Agriculture (USDA) Mortgage Insurance

USDA loans are government-backed loans that are available to borrowers who are buying homes in rural areas.

The USDA mortgage insurance premium is calculated as a percentage of the loan amount. The premium rate varies depending on the loan amount and the borrower's credit score.

USDA mortgage insurance premium = Loan amount x USDA mortgage insurance rate

• For example, a borrower who is borrowing $200,000 with a USDA loan would pay a USDA mortgage insurance premium of $1,000 per year.

Shopping For Mortgage Insurance

Comparing Mortgage Lenders

It is important to compare mortgage lenders to find the best mortgage insurance rates.

• You can get quotes from multiple lenders online or by phone.
• Be sure to compare the interest rates, fees, and mortgage insurance premiums of each lender.

Negotiating Mortgage Insurance Premiums

In some cases, you may be able to negotiate your mortgage insurance premium with the lender.

• You may be able to get a lower premium if you have a higher credit score or if you are making a larger down payment.
• You can also try negotiating the premium if you are getting multiple loans from the same lender.

The amount of mortgage insurance you need will depend on a number of factors. It is important to understand your mortgage insurance requirements before you apply for a loan.

You should compare mortgage lenders and negotiate your mortgage insurance premium to get the best deal possible.