How the Cost of Mortgage Insurance is Determined

 In Common Questions, First-Time Home Buyers, Refinancing your Mortgage

If you don’t have 20% down when you purchase a house, or if you don’t have 20% equity in your house when you refinance, you will have to pay for mortgage insurance.  Many people want to know how they determine the cost of mortgage insurance, and here’s what you need to know.

If you are getting an FHA loan, the calculation for mortgage insurance is easy.  If you have less than 5% down, the annual cost of mortgage insurance is 0.85% of the loan amount.  To get the monthly amount, divide that number by 12.

If you are putting 5% or more down with an FHA loan, the annual cost of mortgage insurance is 0.80% of the loan amount.  Again, to get the monthly amount, divide that number by 12.

One thing to note is that with FHA loans, you always have to pay for mortgage insurance, regardless of how much you put down.

If you are getting a VA loan, there is no mortgage insurance requirement, no matter what the size of your down payment is.

If you are getting a conventional loan (a loan that is not FHA or VA), the 20% rule applies.  If you have less than 20% down, you need mortgage insurance.  If you have 20% or more down, you do not need mortgage insurance.

The cost of mortgage insurance for a conventional loan is not as easy to calculate as it is for an FHA loan, unfortunately.  That’s because the private mortgage insurance companies, which are the companies that issue mortgage insurance for conventional loans, use “black box” pricing.  Black box pricing is a term for the pricing of something that has many different factors included in the pricing.  In other words, the private mortgage insurance companies do not have rate sheets that tell you how much their mortgage insurance costs.  The only way to calculate the pricing is to run the loan file through the pricing software that each mortgage insurance company has.  

Here are the factors that go into the pricing of private mortgage insurance:

  • Loan amount
  • Loan-to-Value Ratio (LTV) – loan size divided by property value
  • Debt-to-Income ratio (DTI) – total debts divided by total income
  • Credit score
  • Level of mortgage insurance coverage (depending on the loan program and the LTV, Fannie Mae and Freddie Mac require different percentages of the loan amount to be insured)
  • Property type (single family, town house, or condo)
  • Transaction type (purchase or refinance)

Because there are so many factors that go into determining the price of mortgage insurance, and each transaction involves borrowers with different factors, just about everyone’s mortgage insurance rates are different.  Also, every mortgage insurance company has different prices.  Our company compares the costs of all the large mortgage insurance companies and then we choose the cheapest one.  This way, you can be sure you will be getting the lowest mortgage insurance rates.

If you have questions about mortgage insurance or if you need a pre-approval for a purchase or a refinance transaction, contact us today.  You will be amazed at how easy it is to get a great mortgage.

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