Is Home Loan Mortgage Insurance Worth It? 

This blog was provided by our expert finance partners at Pulte Mortgage™.

Purchasing a home is a significant goal for many, but saving for a large down payment can be challenging. Home loan mortgage insurance offers a solution by enabling buyers to secure a home with a smaller down payment. 

So, should you consider mortgage loan insurance or wait until you can gather a larger down payment? We’ll help you determine what might be best for you in this post!

Summary:

• What Is Mortgage Insurance? 

  • When Is Mortgage Insurance Required? 

  • How Does Mortgage Insurance Work?

• How Much Does Private Mortgage Insurance Cost? 

  • Calculating Mortgage Insurance

• Is Home Loan Mortgage Insurance Worth It? 

  • Alternatives to Private Mortgage Insurance 

• Home Loan Mortgage Insurance Conclusion

What Is Mortgage Insurance? 

Mortgage insurance is a protective policy that covers the lender in case a borrower defaults on their mortgage. By covering this risk, mortgage insurance opens the door to homeownership to those looking to purchase a home with a down payment of less than 20%. With a smaller down payment, potential buyers are likely more able to buy a home sooner rather than later. 

When Is Home Loan Mortgage Insurance Required? 

Mortgage insurance is typically required when a homebuyer makes a down payment of less than 20% of the home’s purchase price. This requirement acts as a financial safety net for lenders, helping them recover some of their losses if the borrower is unable to repay the loan.

How Does Mortgage Insurance Work? 

When a homebuyer secures a mortgage with a down payment of less than 20%, they must pay a mortgage loan insurance premium. If the borrower defaults on the loan, the insurance policy compensates the lender for the unpaid balance.

How Much Does Private Mortgage Insurance Cost? 

The cost of private mortgage insurance (PMI) varies based on several factors, including the loan amount, the borrower’s credit score, and the size of the down payment. On average, PMI can range from 0.5% to 2% of the loan amount per year. 

Calculating Mortgage Insurance

To calculate your mortgage insurance premium, you need to know your loan amount and PMI rate. Multiply the loan amount by the PMI rate, then divide the result by 12 to determine your monthly payment. Your loan team can provide these figures for you, so don’t hesitate to ask them for help. 

Is Home Loan Mortgage Insurance Worth It? 

Mortgage insurance can be a valuable tool, especially for buyers eager to enter the housing market without waiting years to save for a 20% down payment. However, each homebuyer’s financial situation is unique, so weighing the cost of PMI to see if it’s the best choice for you is essential. 

Alternatives to Private Mortgage Insurance

Government-backed loans, such as Federal Housing Administration (FHA) loans or Veterans Affairs (VA) loans, often have lower down payment requirements and may not require private mortgage insurance. However, these loans have their own eligibility criteria and may charge other fees.

Home Loan Mortgage Insurance Conclusion

So, you could wait to purchase a home until you have a down payment of at least 20% of the purchase price to avoid paying a mortgage insurance fee. However, as you wait, you may be spending money on rent that could go toward building equity on your own property. 

Take some time to carefully evaluate your current financial situation and plans for the future when determining the best course of action. Don’t hesitate to reach out to your loan team for help weighing the pros and cons of home loan mortgage insurance! 

Explore new construction homes today or browse more Pulte® blogs.

Written By: Meagan Rochard, Financial Services Writer

Last Updated: 12/31/24