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Mortgage Insurance Options
Mortgage Insurance covers the risk a lender takes on, in a case a borrower defaults on their loan. On a conventional loan, a home buyer pays private mortgage insurance (PMI). There are six mortgage insurance companies nationally and they set pricing for MI based upon risk, and the most important factors are credit score and down payment amount. Down payments start at 3% down but MI costs decrease at 5%, 10%, and 15% down. There is no MI at 20% down. On a conventional owner occupied loan, conventional mortgage insurance is removable and can drop either automatically or via appeal. Here’s info on how you can remove mortgage insurance after-the-fact.
On a government loan (FHA, VA, USDA), mortgage insurance is paid by the borrower to the government and the government sets the pricing.
Fun fact, the cost of PMI on conventional loans has significantly changed over the years and that’s thanks to implementation of risk based pricing. When I began my career, each MI company had rate cards with PMI costs set based on credit score buckets and down payment and very few other factors. Now each MI company has risk based pricing software and we run this software to get quotes, and this software take into account numerous factors. Borrowers with the least amount of risk are now paying significantly lower MI costs and I can think of numerous examples where MI cost is half or even a third of what it cost one decade ago.
Within conventional financing, there are multiple options and ways to pay for mortgage insurance, and the best option for you depends on how long you intend to have the loan for. Some buyers who put down less than 20% ask about how they can finance a home purchase without monthly mortgage insurance. That can be done through a CRA program, or lender paid MI, or upfront MI.
Prepaid/Upfront MI: You can prepay a fee upfront to avoid mortgage insurance for the life of the loan. For example, on a $500,000 loan with 10% down, with a 760+ credit score, the prepayment of mortgage insurance would cost today about .69-.87%. This is in lieu of paying mortgage insurance of .15-.28%/year. If you own the property for over 3-4 years, prepaying MI makes sense. While the cost of the upfront mortgage insurance varies with down payment and credit score and loan amount, the 3-4 year break even time period usually holds true.
Lender Paid Mortgage Insurance: Instead of paying mortgage insurance monthly yourself, we can sometimes instead roll the mortgage insurance into the interest rate. For a sample 760+ credit score with 5% down, this usually is a .375% increase in the rate. This could be less than paying the mortgage insurance premium directly.
But lender paid mortgage insurance is retained for the life of the loan, whereas monthly mortgage insurance is only on the loan for about 4-10 years. So you’d have to carefully consider how long you plan to own the property, to decide whether lender paid mortgage insurance “pays off” or not.
What is best for you?
That is where I come in – to help you decide. Based on your down payment, loan amount, credit score, assets, and time you plan to own the property, we can do the math. And you can make the decision. Some people also can consider a prepayment of the mortgage insurance upfront, but finance the cost into their loan amount. This is available with higher than the minimum down payments — ask me about financed single premium mortgage insurance if you’re interested.
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