Mortgage Q&A: “How much is mortgage insurance?”
If you have a first mortgage that exceeds 80 percent loan-to-value (LTV), you will most likely need to purchase mortgage insurance, which protects the issuing bank or mortgage lender, not you.
Mortgage insurance is an additional cost that comes on top of the principal, interest, taxes, and homeowners insurance (PITI) that make up your mortgage payment.
The cost of private mortgage insurance (PMI) will vary based on a number of factors, such as the LTV, your credit score, the size of the loan, the amount of coverage, transaction type (refinance vs purchase), loan type and premium type.
The greater the combined risk factors, the higher the cost of PMI, similar to how a mortgage rate rises as the associated loan becomes more high-risk.
Per the Insurance Institute, mortgage insurance premiums can range from $250 to $1,200 per year, though it’s not uncommon to pay several hundred a month for coverage if you’ve got a large loan amount.
If you get an FHA loan at more than 80 percent LTV, you must pay both an upfront mortgage insurance premium and an annual mortgage insurance premium.
Let’s look at a quick example:
$200,000 purchase price
$190,000 loan amount
95% LTV
1% of loan amount for upfront mortgage insurance premium
0.85% of loan amount for annual mortgage insurance premium (paid monthly)
In the scenario above, you’d be looking at a cost of $1,900 initially when you take out the loan, and another $134.58 per month for coverage.
If the mortgage is above 95 percent LTV, the annual mortgage insurance premium increases to 0.90 percent.
Mortgage insurance can be removed once the LTV falls below 80 percent.
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