When you’re planning to buy a home, it’s essential to have a clear understanding of the monthly expenses that you will ultimately pay. Your home purchase price, down payment size and interest rates, will factor into those monthly mortgage payments, and it’s also important to remember to budget for other expenses like homeowner’s insurance and HOA fees, if applicable.
But there’s one more potential expense that many homebuyers forget to include—mortgage insurance. Depending on your home loan type and the size of your down payment, you may be required to purchase mortgage insurance, which will increase your monthly expenses.
Keep reading to understand the ins and outs of Arizona mortgage insurance, if you might need it and how much it would cost.
What Is Mortgage Insurance?
Mortgage insurance, also called private mortgage insurance or PMI, is often required when you take out a conventional mortgage. Your lender will require mortgage insurance if your down payment is for less than 20% of the purchase price of your home. The insurance helps to protect your lender from losing money if you default on your loan. Mortgage insurance typically covers 25 to 30% of the loan, so your lender will receive that money back even if you default.
For example, if you purchase a home for $300,000, you will need a down payment of at least $60,000 to avoid paying mortgage insurance. If you put down less money, you will be required to pay for mortgage insurance until you’ve built up 20% equity in the home. At that point, you can request to end your insurance, which will save you money each month.
Remember that your mortgage insurance is in addition to your homeowner’s insurance. While you can wrap both types of insurance into your monthly mortgage payment, you are technically paying for two different types of insurance.
Factors That Influence Mortgage Insurance Costs In Arizona
There are several factors that go into determining your PMI costs in Arizona. You may want to consider these factors to decide your homebuying budget.
Size of down payment
Your down payment plays a crucial role in how much mortgage insurance you will have to pay and how long you will have to pay it. If you can make a larger down payment, you are minimizing the financial risk that your lender takes in giving you a loan. As a result, your lender will take out less mortgage insurance, reducing your insurance payments.
In contrast, if you can only make a small down payment, your lender will assume a greater risk in giving you a mortgage. Your lender will take out additional mortgage insurance, and you will pay higher costs.
Making a larger down payment also means that you will be closer to that 20% equity point and will be able to cancel your mortgage insurance sooner. Don’t forget that a larger down payment will also mean that you will have lower mortgage payments.
Credit score
Your credit score and credit history provide your lender with important information about how you pay back debt. Your lender will review your credit history and look for indications that you are a reliable borrower, like a history of making all of your payments on time and always being able to repay the full amount of money that you’ve borrowed. Making more than the minimum payments required on your accounts and avoiding maxing out your credit indicates that you handle money responsibly. This minimizes the risk a lender would take in approving you for a mortgage.
A low credit score can indicate that a lender will take a higher risk in giving you a mortgage. Issues like making payments late, using most or even all of your credit limit and only making minimum payments sends a message that you aren’t highly responsible in your borrowing habits.
Your lender may adjust your mortgage insurance requirements based on your credit score and the risk that it indicates. A high score that shows responsible borrowing may reduce your mortgage insurance, while a low score that means less reliable borrowing habits may prompt your lender to require you to pay more for mortgage insurance.
Type of loan
The type of conventional loan that you choose can also affect your mortgage insurance costs. A fixed-rate loan, with its consistent monthly payments throughout its entire life, can reduce your lender’s risks. You may pay less for PMI as a result.
If you choose an adjustable-rate mortgage (ARM), your lender may assume increased risk. With an ARM, your interest rate can fluctuate, potentially increasing the chance of you paying high interest and possibly being unable to afford your mortgage. Your PMI may be higher when you have an ARM, but at the beginning of your mortgage, ARM interest rates are often lower than conventional mortgages. You could potentially save money on interest, and if you use those savings to pay down your mortgage balance, you could build up enough equity in your home to end your PMI.
How Much Is PMI In Arizona?
Since several factors contribute to the PMI calculation, Arizona has no definitive PMI cost. However, PMI usually costs between 0.05% and 1% of your total loan amount.
Let’s say that you buy a home in Phoenix, Arizona. According to the most recent Redfin data, the median sale price for a home in Phoenix is $430,000. Let’s say you put down a 15% down payment of $64,500, leaving you with a fixed-rate conventional loan for $365,500. You also have a great credit score of 750, so your lender charges you a 0.05% PMI rate. You would pay approximately $1,824 in PMI each year, or $152 monthly.
If you bought that same home but only had a 5% down payment of $21,500, you would take out a fixed-rate conventional mortgage for $408,500. If you had a credit score of 750, you may pay 1% on your PMI. You would approximately pay $4,080 per year for your PMI, or $340 per month.
Apply For A Conventional Loan To Help Secure Your Next Home
Paying for mortgage insurance often goes hand in hand with taking out a conventional loan. Fortunately, there are many ways that you can keep your PMI costs down, including making a larger down payment, strategically choosing your mortgage type, and maintaining a good credit score. If you are ready to start your homebuying journey, you can get prequalified today, then head over to our mortgage page to learn more about the funding options available.
