When making a down payment on a house, 20% of the purchase price is considered the standard. But 20% is not a small percentage, especially in the housing market, where 20% usually equates to tens of thousands of dollars. If you can’t afford to spend that much on a down payment, you’re going to need to look into private mortgage insurance (PMI), which means looking into private mortgage insurance rates.
There are several types of mortgage insurances available, though, and if you’re not familiar with what they mean and how they can help you, it can get confusing. To help you find the best private mortgage insurance rates, you should ask these five questions.
When Do You Need Private Mortgage Insurance (PMI)?
If you’re buying a house and making a down payment of less than 20%, you will likely need to invest in mortgage insurance. Investopedia says, “PMI allows borrowers to obtain financing if they can only afford (or prefer) to put down just 5% to 19.99% of the residence’s cost, but it comes with additional monthly costs. Borrowers pay their PMI until they have accumulated enough equity in the home that the lender no longer considers them high-risk.”
Simply put, when you’re paying less than 20% on a down payment, you’re going to need to pay for mortgage insurance.
What Types of Mortgage Insurance Are Out There?
Before you start seriously comparing private mortgage insurance rates, you’re going to want to know what types of mortgage insurance programs are out there. Thankfully, there are just four primary types to be familiar with.
- Borrower-Paid Mortgage Insurance is the most common as the cost of it is folded into your monthly mortgage payments.
- Lender-Paid Mortgage Insurance is when the lender “pays” for your insurance by raising your mortgage rate.
- Single-Premium Mortgage Insurance is paid in a lump sum upfront. It’s nonrefundable, but can help you qualify for a larger loan.
- Split-Premium Mortgage Insurance is when you pay a portion of the insurance as a lump sum at closing and pay off the rest of it with monthly payments.
What’s the Cost of Private Mortgage Insurance?
On average, the cost of private mortgage insurance will fall between 0.55% to 2.25% of the overall loan amount, according to NerdWallet. And since “annual mortgage insurance is re-calculated each year, your PMI cost will go down every year as you pay off the loan.”
The exact cost will vary, of course, especially if you’re using insurance that involves paying a premium upfront. However, the percentages listed above will help you establish the right expectations for the cost of private mortgage insurance.
What Factors Affect Your Private Mortgage Insurance Rates?
Many of the same factors that affect your mortgage rate will also affect your private mortgage insurance rates. For example, you can assume the following factors will have some sway over the rates you’re given:
- Whether your interest rate is fixed or adjustable
- The length of your home loan program
- The amount of your down payment or loan-to-value ratio (LTV)
- Your credit score
Other factors, like the plan you choose and whether you’re paying a premium, will also affect the private mortgage insurance rates you get. So, as always, don’t be afraid to ask questions, so you’ll know how much your mortgage insurance will cost.
How Long Does Private Mortgage Insurance Last?
In most situations, your private mortgage insurance will last until your loan principal drops to 78% of the home’s value. This means that, upon reaching 22% equity in your home, you will no longer need to pay for the cost of private mortgage insurance. However, if you’re on a lender-paid insurance plan, then the price will not drop off, even after you reach 22% equity. Instead, the cost of insurance is built into the interest rate.
If you have further questions about private mortgage insurance rates or want to hear how Poli Mortgage can set you up with the best plan for your situation, get in touch with us today!