Mortgage Insurance: How Much?

The most common type of mortgage coverage is private mortgage insurance (PMI). It enables those without a 20 percent down payment to qualify for a home loan. PMI protects the lender from default if the homeowner cannot continue to pay each month. Another policy that insurance companies offer pays off the mortgage in the event of the homeowner's death.

Cost

Private mortgage insurance generally costs up to 1 percent of the original mortgage and can vary based on the down payment and other loan considerations. For example, a $300,000 mortgage would mean up to $3,000 per year in premiums on top of the regular mortgage payments, or an extra $250 each month. The homeowner can drop PMI by submitting an application when the home's equity rises above 20 percent.

Tax Deductibility

Borrowers who earn less than $100,000 per year may deduct the full cost of their PMI premiums on their tax returns, as of 2011. The allowable deduction becomes lower in 10 percent increments for each $1,000 earned above $100,000. Those with incomes greater than $109,000 can take no deduction. The IRS instituted these deductions and amounts to encourage wider homeownership, without inadvertently subsidizing wealthier taxpayers.

Risk Factors

For most policies they write, insurers rate the risk factors inherent with individual policyholder and price the premiums accordingly. PMI remains the exception, as the carriers base premiums solely on the amount of the original mortgage and size of the down payment. Borrowers with negative credit profiles will pay the same as those with excellent credit histories, provided the mortgages reflect similar dollar amounts.

Mortgage Protection

Mortgage protection insurance is distinct from PMI and will pay the mortgage balance in full if the homeowner dies, which makes it a life insurance policy with a predetermined purpose. In this case, the amount of the down payment is irrelevant and insurers base premiums solely on the total mortgage amount. This type of insurance represents an effective estate-planning tool and can provide heirs with significant asset protection.

References

About the Author

Robert Rimm graduated from the University of Pennsylvania and founded 88keys.com to provide education, writing and communications services for clients within the nonprofit, arts and education communities in the United States, Europe and Russia. His key interests include art and culture, social entrepreneurship, education, the environment and human rights. He is fluent in French and Russian, and is a widely published author.