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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 might pay private mortgage insurance to a private company. There are six mortgage insurance companies nationally. 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.
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.
Most buyers choose to pay mortgage insurance on a monthly basis. But there are two ways to avoid paying monthly mortgage insurance, and that is through either we the lender paying it for you, or through you prepaying it.
This is possible under these loan amounts and these down payments, within conventional financing:
Loans up to $510,400, 3% down or more. (Normally 5% down is required, but a 3% down payment is available if you’ve either not owned real estate within the past 3 years or are financing through a special DPA program or Home Possible/Home Ready)
Loans $510,401-$765,600, 5% down or more
The higher the credit score and the greater the down payment, the less the mortgage insurance costs. Let’s discuss the 2 programs to avoid paying mortgage insurance monthly:
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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