Saving an eighth of a percent on interest rate can save a little on your monthly payment and shopping around on closing costs can save a little on your down payment but perhaps the most overlooked and costly mistake when buying a home is not choosing the right mortgage insurance if the down payment is less than 20%. The wrong decision on this choice can cost thousands of dollars.
Let’s take a generic purchase of 200,000 dollars with the minimum down payment and compare them but before that, here are some definitions that you’ll need:
- Borrower Paid Monthly Mortgage Insurance (BPMI) - With borrower-paid mortgage insurance (BPMI), the borrower pays the MI premium monthly with their mortgage payment (this will annoy you every month when you get your mortgage statement)
- Single Cash Premium Mortgage Insurance - Borrowers can pay a one-time lump sum payment to eliminate the need to pay monthly mortgage insurance premiums (this is nice but it usually means adding to the down payment which isn’t too exciting to most people)
- Single Financed Premium Mortgage Insurance - Borrowers can pay a one-time lump sum payment to eliminate the need to pay monthly mortgage insurance premiums AND finance the cost of the one-time buyout into the loan amount (this is usually the best received and most cost effective option)
- Lender Paid Mortgage Insurance (LPMI) - With LPMI, we pay the PMI premium on the borrower's behalf, while charging a higher interest rate on the loan (this really only makes sense if someone’s not going to own a property very long)
- FHA Mortgage Insurance - FHA mortgage insurance works on a “split premium” basis. Part of it is charged up front and typically financed into the loan while the remainder is paid monthly (this remainder is quite high on loans amortized over 30 years)
Now let’s take a look at the savings/loss comparison on that 200,000 dollar purchase over 10 years:
As you can see, the savings are most abundant using Single Premium Mortgage Insurance. The real question is whether or not to finance it into the loan amount. You’ll want to note that FHA is the most costly choice and this chart doesn’t even factor in the cost of the up-front FHA funding fee.
To run your own
private mortgage insurance calculator specific to your purchase scenario, try this calculator:
Thanks for doing your research and making the smart choice. Happy house hunting!
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