What is Mortgage Insurance – For most homebuyers, the biggest hurdle to owning a home is the down payment. Private mortgage insurance, or private MI, can allow you to purchase a home with less down than what otherwise may be required.
Lenders and investors typically require mortgage insurance for loans with down payments of less than 20%. MI provides lenders a financial guaranty should a loan go into foreclosure. It is this guaranty that allows many lenders not to require a 20% down payment when making home loans.
Here’s how it generally works:
- A borrower buying a $150,000 home makes a 10%, or $15,000, down payment.
- The lender then obtains private MI on the borrower’s $135,000 mortgage, reducing its exposure to loss from $135,000 to $101,250.
- The private MI covers the top portion of the mortgage – usually the top 25% to 30%. In this case, the MI will absorb 25%, or $33,750, of any ultimate loss to the lender.
What are the benefits?
While MI provides an obvious benefit to lenders, many times homebuyers will overlook the benefits MI affords them. These can be significant and may include:
- Buying a home sooner – a higher loan-to-value ratio means less time is needed to save for a down payment.
- Increased buying power – if you have a certain amount set aside for a down payment, using MI may help you afford more home than if you put 20% down.
- Expanded cash-flow options – you may put less down and keep cash for other uses (making investments, paying off debt, or paying for home improvements or emergencies).
- Receiving a refund – some MI options allow for a prorated refund of premiums upon cancellation.
- Faster approvals – loans with MI typically are approved sooner than non-MI or government-backed structures.
- Cancelling coverage – many MI options may be cancelled when no longer needed.
MI options
Mortgage Insurance Companies work with partner lenders to provide you several options when it comes to buying a home. Our more popular programs include:
- Mortgage Insurance Monthly Premiums
- With this option, you would experience no increase in the loan amount and need no additional cash at closing. The premium amount is paid along with your monthly mortgage payment. Your MI coverage can usually be cancelled once your loan amount falls to 75-80% of your home’s value.
- MI Borrower-Paid Singles
- With this premium plan, you have the option of paying the MI premium in one lump sum at closing and making no monthly MI payments. Depending on your lender’s guidelines and your individual situation, you may be able to finance the premium into the loan amount, reducing your closing costs. However, many lenders do not allow for financing the premium into the loan, especially if the borrower is not putting at least 10% down, so this option may require you to bring more to closing.
- MI Split Premiums
- Here you pay a portion of the MI premium up front at closing, in order to greatly reduce the amount you pay along with your monthly mortgage payment. Like Borrower-Paid Singles, you may be able to finance the up-front amount. Again, this will depend on the lender and the amount of your down payment. This premium plan is also cancellable.
- Lender-Paid MI
- As the name suggests, with Lender-Paid MI program, your lender pays the MI premium and not you. However, to cover the cost of the premium, your lender may increase the loan fees or the interest rate.The important thing to remember is that you have mortgage insurance options. Buying a home is one of the biggest financial decisions you may ever make. You want to go into that decision knowing all your options.
MI and FHA
Private MI is the private sector’s alternative to Federal Housing Administration (FHA) mortgage insurance, a government program backed by taxpayers.
Both MI and the government’s FHA program help borrowers purchase homes with a down payment that is less than 20% of a home’s value. Both options are available through most lenders. However, choosing the best option will depend upon your individual situation, so it’s important to be sure your lender is showing you both options.
As you make your decision, be sure to look beyond differences in the monthly payment or interest rate. While both items are important, a mortgage is not a one-day event. Remember to also consider long-term factors like total financing costs and home equity build-up as you make your choice.
Some advantages MI may be able to provide you:
- Save thousands of dollars in total MI expense and increase your home equity, not your loan amount
FHA requires an up-front premium that often is financed into the loan, increasing your loan amount and your long-term debt obligation. With Monthly MI there is no up-front MI premium payment, which saves you thousands of dollars in MI premium paid over the life of your loan and immediately puts you in a much better home equity position. - Lower or comparable monthly payment
Certainly monthly payment is important. Borrowers with good credit scores or who are putting more than the minimum down will find that MI is a very competitive option over FHA. - Chance to cancel your MI coverage
For a 30-year mortgage, the FHA will typically not allow you to cancel the monthly MI payment unless you put down 10% or more at the time you took out the loan. And even then you will need to wait 11 years before you can cancel coverage.However, private mortgage insurance must automatically be cancelled once the loan has reached a certain LTV and the borrower may request to have it cancelled even sooner. In fact, most lenders allow for a new appraisal to determine if you can cancel your MI and reduce your monthly payment. A new appraisal allows you to take advantage of increases in your home’s value linked to home improvements you’ve made or market appreciat
Source: MGIC for Homebuyers
