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How Property Taxes and Insurance Can Affect Your Monthly Mortgage Payment - Quicken Loans Zing Blog

Fact: The majority of Americans can’t afford the coveted 20% down payment when it comes time to buy a house.

According to the National Association of REALTORS®, “88% of recent buyers financed their home purchase. Those who financed their home purchase typically financed 87%.”

That means the average down payment was roughly 13%.

There’s no shame in a down payment of less than 20% on a conventional loan, but it does mean you have to pay private mortgage insurance (PMI). The upside is that mortgage insurance gives you a lot more buying power because you don’t have to bring as much money to the table in the form of a down payment. The downside is that it’s an additional item tacked on to your mortgage payment every month.

What Is PMI And Who Does It Protect?

PMI is a type of mortgage insurance required on all conventional loans backed by Fannie Mae or Freddie Mac for one-unit primary homes or a second home where the down payment made is less than 20%. The down payment or equity amount can change if you have more units in your primary home or an investment property, but we’ll cover that below.

PMI allows the lender to let you purchase a home with a lower down payment or refi with less equity because the insurance policy helps cover the lender’s losses in case you default. In the event of a foreclosure, the mortgage insurer makes a payment to the lender or mortgage investor covered under the policy.

Mortgage insurance is strictly for the benefit of the lender and not the person buying or refinancing. Mortgage insurance is sometimes confused with mortgage life insurance (a type of policy which pays off the mortgage in the event of the client’s untimely passing), but it’s important to note that these aren’t the same. From the point of view of the person getting the mortgage, the good thing about mortgage insurance is that it enables them to get a loan without needing to liquidate their savings to afford a down payment of 20% or more.

How Much Is Mortgage Insurance?

The actual cost of mortgage insurance is based on several factors. To begin with, lender-paid mortgage insurance (LPMI) is more expensive for a comparable amount of coverage than a similar amount of borrower-paid mortgage insurance (BPMI) coverage would be. We’ll explain the difference between these two options in a minute.

Beyond that, the cost for coverage is all based on risk factors. The cost of coverage will depend on factors like your down payment or equity amount, your property type (primary, vacation, investment, etc.), debt-to-income ratio (DTI) and whether you’re taking cash out. Also considered are your median FICO® Score and the term of your loan. Finally, adjustable rate mortgages (ARMs) are also considered a bigger risk than fixed-rate mortgages so the PMI will be slightly higher with those.

To give you an idea of how much you can expect to pay for mortgage insurance, let’s take an example from major mortgage insurance provider MGIC. When you read this chart, you’re going to see something called LTV. This stands for loan-to-value ratio and you can think of it as the inverse of your down payment or equity amount. For example, your LTV would be 97% if you had a down payment of 3%.

For this scenario, let’s assume your lender has determined you need the maximum coverage amount of 35% based on having a 3% down payment. Further, let’s also assume you have a credit score of 750. This is a $300,000 30-year fixed-rate loan with BPMI.

By looking at the first table on the sheet, we see that the BPMI price for our scenario is 0.7%. This means that your annual mortgage insurance cost is 0.7% of your overall loan amount. This is divided into monthly payments so that your monthly cost is actually $175 ($300,000 × 0.007 equals $2,100/12 = $175).

It’s worth noting that, although we based this example on public rate sheets, lenders negotiate their own rates with mortgage insurers. Therefore, the mortgage insurance cost is certainly something to consider when comparing lenders. Quicken Loans® is able to get some of the lowest rates available in the industry for our clients for both BPMI and LPMI.1

How Long Do You Have To Pay Mortgage Insurance?

There are three different ways to pay for private mortgage insurance. Let’s run through those real quick.

BPMI is the most straightforward. It’s a monthly fee added on to your mortgage insurance that can be removed once you reach 20% equity in your home.

LPMI programs like PMI Advantage allow you to avoid a monthly mortgage insurance payment in exchange for paying a slightly higher interest rate than you would on a loan without LPMI. It’s important to note that this higher interest rate sticks around for the life of the loan. Depending on market conditions at the time, you may be able to save money in a couple years by refinancing at a lower rate without mortgage insurance once you reach at least 20% equity in your home.

There’s a third option that’s a variation of LPMI where you pay for part or all of the PMI policy at closing. If you make a partial payment, you’ll get a lower interest rate with LPMI. If you pay for the whole policy, you’d get a rate identical to the one you’d receive if you weren’t paying LPMI, but it would be without the extra monthly payment associated with BPMI.

If you couldn’t avoid PMI with a 20% down payment, don’t worry: BPMI payments will eventually go away either on their own or through a more proactive approach.

How To Get Rid Of PMI On Conventional Loans

Conventional loans are the most flexible type of loan, allowing borrowers to purchase the greatest range of properties. However, this variety means there are a lot of variables that come into play in determining when (or if) mortgage insurance can be canceled.

One thing to note is that unless your mortgage insurance automatically cancels based on one of the scenarios below, the Homeowners Protection Act requires that your request be in writing. Because of this, we advise Quicken Loans clients that the best thing to do is give us a call at (800) 508-0944 to verify whether you might be eligible before jumping through a ton of hoops.

Below is a chart that will help you determine whether you’re eligible to get rid of PMI on your conventional loan, but we’ll go deeper on specifics in the coming sections.

 

One-Unit Primary Residence Or Vacation Home

If the residence is a single-family primary home or second home, your mortgage insurance will be canceled automatically in one of the following scenarios (whichever happens first):

  • The LTV on your property reaches 78% which means you’ve earned 22% equity in your home based on the original amortization schedule (and you didn’t make extra payments to get it there).
  • You reach the midpoint of your mortgage term (year 15 on a 30-year mortgage, for example).

If you don’t want to wait for your PMI to auto-cancel, you have some options. When your LTV reaches 80% through payments, you can request cancellation. In most cases, you’ll have to get a new appraisal in order to verify that your home didn’t lose value since closing.

Fannie Mae and Freddie Mac both allow you to make extra payments in order to get to 80% sooner. If you don’t know whether your conventional loan is held by Fannie Mae or Freddie Mac, you can use these lookup tools.

If you’ve made substantial home improvements to increase your equity by increasing your property value, Fannie Mae requires that you have 80% or less LTV before they’ll take off mortgage insurance, as does Freddie Mac. All improvements have to be called out specifically in a new appraisal.

If you’re requesting removal of your PMI based on natural increases in your property value 2 – 5 years after your loan closes, both Fannie Mae and Freddie Mac require a new appraisal, and the LTV has to be 75% or less. If your removal request comes more than 5 years after your closing, the LTV can be 80% or less with a new appraisal. These requirements apply to insurance removal based on market value increases not related to home improvements.

Multi-Unit Primary Residence Or Investment Property

If you have a multi-unit primary residence or investment property, things are a bit different. With Fannie Mae, mortgage insurance goes away on its own halfway through the loan term. By contrast, Freddie Mac does not auto-cancel mortgage insurance.

You can cancel PMI on your own when LTV reaches 70% based on the original value with Fannie Mae. Freddie Mac requires 65% for cancellation.

The requirements for Fannie and Freddie are the same if you want to have a new appraisal done to show a lower LTV. This is true whether the lowered LTV is based on a natural market-based increase in home value or home improvements. Keep in mind that if you’re requesting removal based on home improvements from Fannie Mae, you must have had the loan for at least 2 years prior to requesting PMI removal on your investment property.

Other Types Of Mortgage Insurance

So far we’ve talked about private mortgage insurance when it comes to conventional loans because that’s the type that goes away after a while depending on how long you’ve been paying on your loan and your equity.

However, there’s mortgage insurance (or its equivalent) associated with two other types of loans: FHA and USDA. They have different structures and are harder to cancel, although it’s not always impossible.

FHA Loans: How To Get Rid Of Mortgage Insurance Premiums (MIP) 

MIP is like PMI in that it’s mortgage insurance, but it’s associated with FHA loans. Unlike PMI where rates are negotiated by interactions in the market, mortgage insurance premiums on FHA loans are set by the government.

If you have an FHA loan, you pay a portion of the premium up front at the close of the loan and then continue to pay mortgage insurance premiums (MIP) on a monthly basis. The upfront premium is always 1.75% of the loan amount. If you can’t afford to pay this at closing, it can be financed into your loan amount.

In addition to the upfront premium, there’s an annual premium that’s based on your loan type as well as your down payment or equity amount. If you have a standard FHA loan with a 3.5% down payment on a loan of no more than $625,500, the annual MIP is 0.85% broken into monthly payments.

Meanwhile with an FHA Streamline where you go from one FHA loan to another for the purpose of lowering your rate and/or changing your term, the MIP rates are a little better. In this case, there’s an upfront rate of 0.01% of your loan amount and an annual MIP rate of 0.55%.

Unfortunately, if you purchased or refinanced with an FHA loan on or after June 3, 2013 and you had a down payment of less than 10%, MIP lasts for the term of the loan. With down payments of 10% or more, you still have to pay MIP for 11 years.

If you haven’t purchased or refinanced with an FHA loan since June 3, 2013, the outlook is a little better. On a 15-year term, MIP is canceled when your LTV reaches 78%. For longer terms, the LTV requirement remains the same and you have to pay MIP for at least 5 years.

 

FHA MIP removal chart.

There’s one other way to stop paying these premiums if you’re currently in an FHA loan. Assuming you meet the other qualification factors (e.g. at least a 620 median FICO® score), you can refinance into a conventional loan and request mortgage insurance removal once you reach 20% equity in your home.

USDA Loans: How To Stop Paying Guarantee Fees

USDA loans originated through private lenders and guaranteed by the USDA have what are known as guarantee fees that function like mortgage insurance. These rates are also set by the government but the rates are lower than comparable FHA loans.

The upfront guarantee fee is 1% of your loan amount, either paid at closing or refinanced into the loan. The annual guarantee fee is equal to 0.35% of the average unpaid principal balance based on the original amortization schedule without making any extra payments.

The downside here is that guarantee fees live for the life of the loan. The only way to get rid of them is by refinancing into a conventional loan and requesting PMI removal after you reach 20% equity.

This isn’t common, but there are cases in which you can receive your loan directly from the USDA. In these instances, there are no guarantee fees.

Final Notes On Cancelling PMI And MIP

There are a couple additional things to know about mortgage insurance cancellation. In order for mortgage insurance to auto-cancel, you have to be current on your payments. If you want to request a cancellation yourself, you can’t have had a 30-day late payment in the last year. You also can’t have had payments more than 60 days late in the past 2 years.

If you’re in a conventional or FHA loan and feel you might qualify to remove PMI or MIP as a Quicken Loans client, we recommend you reach out to our servicing team at (800) 508-0944. If you’d like to look into your options to buy with or refinance into a conventional loan and eventually avoid mortgage insurance altogether, you can get started online with Rocket Mortgage® by Quicken Loans or give us a call at (800) 785-4788 to speak with one of our Home Loan Experts. If you have any questions, you can leave them for us in the comments below.

1BPMI monthly and LPMI single rate data is compared to publicly published private mortgage insurance rates.

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This Post Has 35 Comments

  1. Hello,why if I pay my MPI in the closing cost my apr is going to be higher? Is I pay my pmi save me money if I do it monthly?thank you,my loan is going to be conventional 3 dp.

    1. Hi Jorge:

      I’m ultimately going to recommend that you speak with someone about your options. That said, I’m going to attempt to give a general explanation.

      No matter how you pay for PMI, the annual percentage rate will be higher than if you weren’t paying for mortgage insurance because it’s the next cost you have to pay if you don’t make a 20% down payment. APR is meant to show the total cost of the loan. As far as whether it’s cheaper to pay the PMI upfront at closing or to do it on a monthly basis is a question for a mortgage expert who can look into your particular situation. I can tell you that if you were to pay the PMI upfront closing, your monthly payment would be cheaper than it would be with the fee tacked on for mortgage insurance. However, I really recommend you speak with one of our Home Loan Experts at (888) 980-6716.

  2. I am currently paying MIP. When getting my Escrow Analysis annually it decreases except for this year. Iit increased and caused my mortgage to increase even though I was over on my Escrow acct and received a refund. How can that happen?

    1. Hi Sue:

      Although MIP is included in your escrow account, that’s most likely not what caused your monthly escrow amount to go up. MIP is a fee that remains constant until you refinance or purchase a new home. There are instances in which it may drop off altogether. I think something different is happening here.

      It’s more likely that your property taxes or homeowner’s insurance premium have increased. In that case, you could end up having to pay more in the future despite getting a refund back on your escrow account for the previous year. It’s about future planning and they want to try to avoid having you be short on your payment. Property values have generally been rising over time for the last several years which will change the value of your tax assessment. I hope this helps!

  3. I’m closing a loan and based on the projected monthly payments, i have to pay Mortgage Insurance for 15 years before its written off. I have a conventional loan and was given 4.75% interest rate with 3% DP and at least 5.6% APR. Will my mortgage insurance be removed when i have paid 22% equity? How can i remove this in my monthly payments? Can i pay this up front? Appreciate any advise, comments from QL.

    1. Hi Maja:

      I don’t know who the investor is in your loan, but most conventional loans with 3% down payments are from Fannie Mae or Freddie Mac. With those loans, you can opt to pay for mortgage insurance up front and not have a monthly payment or have it eliminated from your monthly payment by having the lender pay for it up front and taking a slightly higher rate. If you do have mortgage insurance in your monthly payment, it automatically comes off conventional loans through Fannie Mae or Freddie Mac once you reach 22% equity assuming you’re current on your payments. You can also request to have mortgage insurance removed once you reach 20% equity. You just have to get an appraisal done to verify that the value of the property hasn’t gone down and that you actually have 20% equity.

      If you would like someone to go over this with you in more detail, you can speak with one of our Home Loan Experts at (888) 980-6716.

  4. I purched a home through FHA it was a Rual development peogram that gave 5,000 down at closing and after 5 years it is to be forgiven, and out of pocket it was less than 10% down. If I wait out the 5 years and refinance to a conventional loan as long as my appraisal is over the 20% mark will I be able to avoid MIP and PMI since the Property is over the 20% mark?

    1. Hi Melvin:

      I don’t know the specifics of that particular program, but I can speak about things from an equity standpoint. If the $5,000 down is eventually applied to your regular loan balance, it counts toward your equity. If you were eventually able to get to 20% equity at any time after that five-year point, you could refinance into a conventional loan if you met the qualifications. If the combination of the new appraisal and the lowering of your loan balance by your monthly payments on the previous loan showed you had reached 20% equity, you wouldn’t have to pay any mortgage insurance on the conventional loan. Hope this helps!

      When you’re ready, you can go over the loan options online with Rocket Mortgage or go ahead and give us a call at (888) 980-6716 to speak with one of our Home Loan Experts. Have a good day!

  5. I purchased a home in June 2018. I paid the PMI upfront approx. $4500. I just invested $60,000 remodeling the house which I am sure it increased the value of the house to give me more than 20% on equity. Can I submit a new appraisal to the lender to proof that I have the 20%+ equity and refund the PMI money I paid upfront? or apply that money toward the principal of the loan?
    Thanks for your prompt response
    Oscarina Alvarez

    1. Hi Oscarina:

      There are multiple elements here, so I’m going to try to go over them one at a time.

      1. You can ask for a new appraisal. You may or may not have to pay for it through your servicer.
      2. If your investor is Fannie Mae, you actually have to show 25% equity after home improvements in order to take the mortgage insurance payment off a one-unit primary home. If the investor is Freddie Mac, the guideline is still 20% after home improvements.
      3. There’s no refund of upfront or monthly PMI payments. You just get to stop paying it once you reach the requisite amount of equity.

      Hope this helps clarify things!

  6. hello, we refinanced our house back in march of 2013 for a lower interest rate. it is an fha loan and in my original loan paperwork(its been sold a few times since to other banks) it says my mip stops april 1st, 2018. I called the current holder of the loan and was told it does not acct my house appraised for only 413,000 but that was what my loan amount was. they used my original purchased price when I refied which was 475,000.00. how do I fight that one?

    1. Hi Dave:

      I’m a little flummoxed here. For starters, your loan is based on what the house appraises for when you refinance and how much equity you have compared to the original loan amount. However, if your paperwork says you should stop paying MIP as of April 1, I would ask them what changed from the paperwork you had. Property values have been in an upward cycle, not a downward one. You do have to pay MIP for at least five years on a 30-year loan and you have to have at least 22% equity to get rid of MIP. I would talk to your servicer and ask them what changed. I would hope they have a detailed explanation.

      Thanks,
      Kevin

  7. Question- I have a VA 15 year refinance mortgage with QL. I am 75 years of age, and my wife (67 y.o.) is concerned that I do not have life insurance. At this age, am I eligible for mortgage insurance on my $100,000 balance? Do I need insurance on a VA loan to insure that she can remain in the house if I die before the loan is paid? The property appraisal one year ago was for $165000. I do not want her to lose the equity due to a foreclosure.

    1. Hi Cecil, mortgage insurance is actually for the protection of the lender. What you are referencing is mortgage life insurance, you may want to reach out to a mortgage life insurance provider for more information. Thanks!

  8. We purchased our home in December of 07 for $132000 it’s now worth $175,000 and we owe around $104,000. We pay Mip and I want to know at what point can we stop MIP and if we don’t ever default on the loan then do we get MIP back? Probably not but thought I’d check.

    1. Hi Brandi:

      The bad news is that you never get mortgage insurance payments back. The good news is that you’re almost done paying mortgage insurance. FHA calculates your amount of equity based on the original value of the home for purposes of when mortgage insurance does or doesn’t come off. Because you’ve had your home since December 2007, it automatically cancels once your equity reaches 22%. Based on my calculations, you’re about 0.78% away from hitting that mark. I hope this helps!

      Thanks,
      Kevin Graham

    1. The money you pay for “pmi” is the premium for Private Mortgage Insurance. Just like your health or auto insurance premiums, you will not get it back.

  9. I️ bought a home in 2012 for 142,000. I️ owe just under 125,000 and I️ pay MIP. Will I️ ever be able to not pay MIP after I️ pay down a certain amount ?

    1. Hi Heather:

      If you haven’t refinanced since 2012, your MIP can come off. The exact circumstances depend on whether you have a 15-year loan or any other term. I’m also assuming your loan is current and you haven’t been late in the last year.

      You currently have about 12% equity in your home. If you have a 15-year loan, your MIP can come off when you reach 22% equity regardless of how long you have been making payments.

      If you have any term other than 15 years, your MIP can cancel at 22% equity provided you’ve been making MIP payments for at least five years. I hope this helps!

      You can also refinance into a conventional loan down the line if you want. If you would like to look into your options to do that, you can do so through Rocket Mortgage or give us a call at (888) 980-6716. One of our Home Loan Experts will be happy to work with you.

      Thanks,
      Kevin Graham

  10. If you pay cash for a property,do you have to get insurance on that property even tho the house is going to be tore down,and pool covered up

    1. You don’t have to worry about mortgage insurance, but some sort of personal property insurance to protect any assets being kept on the property might be something worth looking into. Hope this helps!

  11. hello , I bought a house last year, they made me pay lump sum $8960 for MIP . I am also paying monthly PMI of about $300. Can I thought MIP was for FHA loan. Can they charge me for both? I only put 5% down on a $539,000 house.

    1. Hi Joyce:

      That depends on the type of loan you have. MIP is only for FHA loans. You’re correct. That being said, the USDA has something called a guarantee fee with its loans where you do pay a certain amount up front and then a little every month for something that functions similarly to mortgage insurance. If you have a VA loan, it also has a guarantee fee that you pay upfront and never pay again. However, if you didn’t have it all up front, they can also roll that into of the loan and you can pay on that monthly. There’s also the possibility that you were paying for mortgage interest points and not MIP which is mortgage insurance premium. Mortgage interest points enable you to get a lower rate and make a lower monthly payment. That said, they have nothing to do with mortgage insurance.

      I can only theorize about what might be happening. One of our Home Loan Experts could take a deep dive into your situation and give you more insight into exactly what’s going on. You can get in touch with them by calling (888) 980-6716. Hope this helps!

      Thanks,
      Kevin Graham

    1. Hi Karen:

      Lenders compare your gross monthly income to any debt payments reported on your credit report for things like student loans, personal and car loans, housing payments and credit cards. You can find more information in this post on debt-to-income ratio.

      Thanks,
      Kevin Graham

  12. LPMI means the lender pays the full premium up front and in exchange you accept a higher interest rate. If you look at the total cost of both loans most often the only time it is beat to not do LPMI is if you intend to keep your mortgage the full term utility paid off. If you look at the amortization of a 30 year mortgage it is years before the loan is down to where the PMI can be removed. When we bought our first home and needed PMI I looked at both amortization schedules and calculated how long we needed to keep the mortgage to not save money with LPMI and on the off chance we have the mortgage until paid in full how much more LPMI cost (our answer about $2000).

    1. Hi Stephanie:

      You’re exactly right about how all LPMI programs work. And you definitely have to do the math to see whether it makes sense for you based on both your current situation and expectations of your future plans. That being said, sometimes the rates are different from lender to lender because there are negotiations that take place with insurance providers, so the rates for LPMI are not all the same.

      Thanks,
      Kevin Graham

    1. Hi Mike:

      LPMI programs just get rid of the monthly mortgage insurance cost being added to your bill. The way PMI Advantage and similar LPMI programs from other lenders work is that you take a slightly higher interest rate in exchange for us paying for the mortgage insurance up front. This still ends up being a better deal mathematically for many clients. Hope this helps clarify!

      Thanks,
      Kevin Graham

  13. lender paid mortality Insurance????? how is this lender paid if the cost is integrated in to your loan? seems like the borrower is still paying for it.

  14. My concern is I have a30 year refinance quicken loan. What if I get in a car accident and I’m laid up for months in rehab. Will my insurance help pay the mortgage?

    1. Hi Dee:

      Unfortunately, mortgage insurance is meant to protect the lender and investor in the loan. If you default, it pays off so not as much money is lost on their end. In order to have payments made in the event of a medical or other emergency, you would need another type of insurance. The benefit of mortgage insurance from a client perspective is that by paying it, you get to make a lower down payment rather than putting 20% down. I know that’s not the answer you’re looking for, but hopefully, it helps clarify things.

      Thanks,
      Kevin Graham

  15. Hi everyone l need some information about fha loan for example if putting twenty percent down did l avoid pmi or mip on the loans for the house

    1. Hi Fuad:

      With an FHA loan, even if you put 20% down, you’re still going to pay mortgage insurance for 11 years. You can avoid mortgage insurance with a 20% down payment on a conventional loan. Conventional loans do require a 620 credit score. Hope this helps!

      Thanks,
      Kevin Graham

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