What is mortgage Insurance?
By Jase Stevens
Nov 4, 2018
Nov 4, 2018
If you are planning on buying a new home with a down payment lower than 20%, it's important that you get familiar with mortgage insurance, and how it will affect the total cost of your mortgage. Let's get a little more familiar with it...
What Is Mortgage Insurance?
To offer affordable mortgage options, lenders often require some form of mortgage insurance for borrowers putting less than 20%. This type of insurance lowers the lenders' financial risk and allows them to make home ownership an option for people without the cash for a "traditional" down payment.
Most borrowers choose to include they're mortgage insurance as part of their monthly payments; although, homeowners often have the option to pay up front instead. Some lenders also offer “lender-paid” mortgage insurance, meaning they pay for your mortgage insurance up front, and you repay them every month with a slightly higher interest rate.
Your mortgage insurance payments will automatically end when you reach 22% equity in your home or on your request at 20% equity on all conventional loans. Keep in mind that FHA loans require a different mortgage insurance that can not be removed, so it’s often paid for the life of the loan.
Your Unique Rate Depends On Multiple Factors, But Here Are A Few To Keep In Mind:
Is Mortgage Insurance Worth It?
While low down payment loans can make it easier or faster to get your dream home, you might be worried about the additional cost that comes with private mortgage insurance. So should you wait until you have that magic 20% down payment?
If you’re a renter and the only thing in your way of buying is the down payment, consider this: by the time you save enough to make that 20% down payment, there’s a good chance you’ve already spent the money you “saved” on mortgage insurance on your rent.
Understanding Your Options
Deciding if it’s the right time to buy? Planning your down payment strategy? A great way to understand your options is by exploring each scenario with a mortgage expert. They can help you understand your numbers, their impact on your mortgage insurance and overall monthly payment, and what makes the most sense for your unique circumstances. Schedule a free consultation with one of our loan consultants today for honest & knowledgeable guidance and support.
What Is Mortgage Insurance?
To offer affordable mortgage options, lenders often require some form of mortgage insurance for borrowers putting less than 20%. This type of insurance lowers the lenders' financial risk and allows them to make home ownership an option for people without the cash for a "traditional" down payment.
Most borrowers choose to include they're mortgage insurance as part of their monthly payments; although, homeowners often have the option to pay up front instead. Some lenders also offer “lender-paid” mortgage insurance, meaning they pay for your mortgage insurance up front, and you repay them every month with a slightly higher interest rate.
Your mortgage insurance payments will automatically end when you reach 22% equity in your home or on your request at 20% equity on all conventional loans. Keep in mind that FHA loans require a different mortgage insurance that can not be removed, so it’s often paid for the life of the loan.
Your Unique Rate Depends On Multiple Factors, But Here Are A Few To Keep In Mind:
- Down payment percentage: The higher your down payment, the lower your mortgage insurance payment. This works in tiers, so your PMI will be the lowest when you put 15% down, then 10%, then 5%, then 3%.
- Credit score: The higher your credit score, the lower your mortgage insurance payment. Again, this works in tiers — your PMI will be the lowest if you have a credit score above 760, and the pricing will increase with every 20-point drop in your credit score.
- Debt-to-income (DTI) ratio: Your DTI ratio is your total monthly debt payments divided by your gross monthly income. If your DTI is above the 45% threshold, your PMI may cost significantly more.
- Property occupancy: When you apply for a mortgage, you’ll be asked how your property will be used. PMI will be lowest if your property is classified as a primary residence, slightly higher if it’s a second home, and highest if it’s an investment property.
- Number of borrowers: A borrower is anyone listed on your mortgage whose income, assets, and credit history are used to qualify for the loan. If you have more than one borrower on your mortgage, your PMI will be cheaper. That’s because lenders feel safer knowing that at least two people are responsible for the loan.
Is Mortgage Insurance Worth It?
While low down payment loans can make it easier or faster to get your dream home, you might be worried about the additional cost that comes with private mortgage insurance. So should you wait until you have that magic 20% down payment?
If you’re a renter and the only thing in your way of buying is the down payment, consider this: by the time you save enough to make that 20% down payment, there’s a good chance you’ve already spent the money you “saved” on mortgage insurance on your rent.
Understanding Your Options
Deciding if it’s the right time to buy? Planning your down payment strategy? A great way to understand your options is by exploring each scenario with a mortgage expert. They can help you understand your numbers, their impact on your mortgage insurance and overall monthly payment, and what makes the most sense for your unique circumstances. Schedule a free consultation with one of our loan consultants today for honest & knowledgeable guidance and support.