Mortgage Insurance: What It Costs and Who Can Pay It

The guide in brief

Mortgage insurance: the guide in brief

Here is a plain summary of the main points in Mortgage Insurance: What It Costs and Who Can Pay It. The full guide works every comparison through on a priced example and ends with the questions to put to any lender. On a conventional loan with a smaller down payment, mortgage insurance is usually required. It protects the lender, not you, if a borrower stops paying.

A structure, not a fee

Most buyers are shown one mortgage insurance figure and assume it is the price. It is really one way of paying for the coverage. The coverage underneath is the same; what changes is who pays, when, and whether the cost can ever end. There are three common ways to pay:

• Monthly, as part of your mortgage payment;
• Once, at closing, as a single premium;
• Built into the rate, where a higher rate pays for the coverage.

Only one version ever ends

Monthly mortgage insurance on a conventional loan is the only kind you can remove. Once your balance falls to a set share of the home’s original value, you can ask your servicer to remove it, and federal law ends it automatically a little later, provided your payments are up to date. A single premium paid at closing is usually not refunded: if you sell or refinance early, that money is spent. A cost built into your rate stays for the life of the loan, because a rate cannot be cancelled. FHA mortgage insurance follows its own rules, set out on our FHA loans page.

Paying once or paying monthly

The common rule of thumb divides the single premium by the monthly premium to find the point where paying once comes out ahead. The guide points out what that leaves out: you hand over the whole premium on the first day, while the monthly version is paid over years, and money in your pocket has value of its own. Counted honestly, the crossover comes later than the rule of thumb suggests. If you are confident you will keep the loan well past that point and the cash does not strain your closing, paying once can cost less. If you might move or refinance sooner, or cash is tight, monthly keeps your options open and is the only version you can cancel.

Ask the seller for the premium, not the price

If a seller agrees to a credit, there are two places to put it. As a price cut, it makes the loan a little smaller, but your down payment is still the same share of the price, so the monthly mortgage insurance usually stays. Put toward a single premium instead, the monthly mortgage insurance can disappear, which lowers the monthly payment, though the loan stays larger. The lower payment helps from the first month; the smaller loan wins over a short stay. So this is a decision about how long you expect to stay. Two cautions: every loan program limits what a seller may pay toward your costs, so ask your lender before you write the offer, and a credit that keeps the price unchanged needs the home to appraise at that full price.

When a lender offers to cover it with a higher rate

A slightly higher rate can produce a lender credit that pays the premium, so nothing comes out of pocket and there is no monthly premium. It sounds like a bargain, but rates are priced in steps while the premium is not, so you usually pay for some rounding. A higher rate also pays down less of your balance each month, so comparing payments alone can make the rate look cheaper than it is. Ask to see the first year’s interest both ways, not just the payment, and remember that the higher rate never comes off.

How to get monthly mortgage insurance removed

Your servicer must tell you that the right exists, but it will not act until you ask. Make the request in writing, keep your payments current with a good recent history, and expect the servicer to check that the home’s value has not fallen and that there is no second loan on it. Some servicers will also consider the home’s current value, usually with an appraisal that you pay for, so ask what it accepts before you order anything. If the answer is no, the servicer has to say why.

Read the full FAQ for how PMI removal works, our home purchase loans page for the programs and their mortgage insurance, or ask a licensed loan officer to price the monthly and single premium side by side on your own file.