Is Homeowners Insurance Included In A Mortgage?

BY Daniel Verderame

Published: July 11, 2024 | 5 min read

Homeowners insurance provides financial protection if your home is destroyed or severely damaged. In contrast, mortgage insurance protects your lender if you cannot make your mortgage payments. As a matter of fact, this is why you should understand that mortgage insurance is typically required for those who do not put down 20 percent at the closing.

Here’s a quick breakdown:

Conventional Loans: Private Mortgage Insurance (PMI) is required if your down payment is less than 20% (or you borrow more than 80%). It increases the cost of your monthly mortgage payment; however, you can request to remove PMI after you've paid off enough of your loan to have 20% equity in your home.
FHA Loans: Compared to traditional mortgage loans, these loans, which are guaranteed by the Federal Housing Administration (FHA), have far more accommodating lending conditions. While PMI with conventional loans goes away over time, MIP (mortgage insurance premium) is typically for the life of the loan.

Owning a home involves mortgage insurance, and you must be thinking about how much mortgage insurance costs might be.

For a specific mortgage insurance estimate, we recommend speaking with our experts at Total Mortgage – one of the most trusted Mortgage companies in the US.

How much does mortgage insurance cost for conventional loans?

A typical loan with private mortgage insurance is a little different. This is often a monthly fee that is added to your mortgage and accumulates to several thousand dollars annually. Your loan size, down payment, and credit score all have an impact on how much you owe.

Private mortgage insurance (PMI) typically carries a yearly fee of 0.3-1.15% of the original loan principal. However, some loan programs offer less expensive costs. Suppose you’re buying a $200,000 house and making a down payment of $10,000 (5% of the purchase price). Your mortgage is now $190,000 at 1% PMI, which comes to about $158 monthly or $1,900 per year.

How much does mortgage insurance cost for FHA loans?

Mortgage insurance for FHA loans is often more costly and less flexible than conventional home loans. In other words, FHA loans mandate an up-front premium and another one paid in 12 equal installments annually. The payment will be higher.

You’ll have to pay an upfront MIP of 1.75% of your loan principal for an FHA loan. The annual premium amount will be between 0.45% - 1.05% of your mortgage loan.

Estimating Your Mortgage Insurance Costs:

During your homebuying process, there are two papers that the lender must legally give you indicating your mortgage insurance:

Any lender must provide you with a loan estimate within three days of receiving your mortgage application. However, you can always ask for one from the multiple lenders you are considering for a mortgage. Such information makes the Loan Estimate a great way to compare loans before locking yourself into a lender. These values would appear in the “Projected Payments” portion of the projected cost of the mortgage insurance.
Your lender should have given you a Closing Disclosure, written in plain language, three days before closing. The last section of note on your loan terms and costs will be the “Projected Payments.”

Will Your Premium Increase?

Nope! Once you have locked in your original mortgage, your PMI and MIP payments will also remain the same for the life of the loan.

What if I want to pay for the mortgage insurance upfront with my FHA loan?

Yes, a percentage payment is required for some conventional loans, but you must meet the requirement that you use a lender that offers “lender-paid” private mortgage insurance. You pay a little more interest rate with lender-paid PMI, but you have zero monthly PMI costs.

Is Lender-paid mortgage insurance real?

While there are limited circumstances where the lender will pay for mortgage insurance (lender-paid mortgage insurance or LPMI), you will generally pay a higher interest rate to cover the cost. The additional code may be 25 percent; however, that would not essentially be lower than what mortgage insurance would cost if you chose to pay it yourself.

If you’ve realized that LPMI is exactly what you need but are still not sure whether it’s an appropriate choice for you, then here are some aspects to consider:

On the plus side:

Typically, mortgage interest is tax-deductible, but you can only claim the deduction for PMI on conventional loans if you itemize. There could be additional restrictions if you are at huge gross modified revenue.
Since most government-backed loans (i.e., those through the FHA) require a mortgage insurance premium (MIP), LPMI on a conventional loan may prove more affordable.

However:

This higher interest rate you are paying is not temporary like PMI and cannot be removed without a refinance. Private mortgage insurance, on the other hand, can be removed once you have 20% equity in your home.

Can Mortgage Insurance Be Avoided?

Some loan programs allow as little as a 3% down payment without mortgage insurance.

Examples include:

A few credit unions provide PMI-free loans to borrowers with very good credit!
No down payment, no PMI for veterans (VA loans)
It is also common for these physician's loans for doctors to have no PMI and other desired features.
Low down payment loans from some banks to higher risk moderate-and low-income homebuyers.

Why Choose Total Mortgage?

Total Mortgage was founded by John Walsh in 1997 with nothing but a briefcase and a dream. Originally a three-person shop, we are now a national lender who not only weathered the 2007 housing crisis on the simple mantra - we never loan money that our borrowers can't afford to repay.

We now provide the benefits of a national lender along with the personalized neighborhood service of a community bank. At Total Mortgage, you will experience integrity, expertise, and dedication.

Ready to find your dream home? We walk you through the whole process.