Does Mortgage Insurance Make Sense For Me?
These days more and more homebuyers are struggling with the question of mortgage insurance.
It is important to note that the type of mortgage insurance we are talking about does not protect you or pay off your mortgage if you die. This type of mortgage insurance is typically required by the lender to protect their investment in the case that you default (fail to pay) your mortgage.
When is mortgage insurance required?
1. If purchasing a home using conventional financing the lender will require mortgage insurance if you are putting less than 20% down on the purchase of a property.
2. If purchasing a home using FHA or USDA financing, mortgage insurance is required to be paid both up front (this is typically financed) AND monthly. For these programs, mortgage insurance is required even if you are planning on putting down the 20%.
3. If purchasing a home using VA financing, there is an up front fee called a funding fee that helps to protect VA in the case of a default.
How long will I have to pay Mortgage Insurance? It depends on the type of loan.
Conventional loans will typically cancel the mortgage insurance once the loan amount reaches 78% of the purchase price (NOT the appraised value).
FHA loans now require the mortgage insurance to be paid for the LIFE OF THE LOAN if you are putting less than 10% down on your purchase. See the chart below to see how long you will be paying mortgage insurance for your FHA loan.
Should I use FHA or conventional financing if putting less than 20% down?
It depends on your situation. With low credit scores or minimal assets available, FHA may be your only option. Since FHA premiums have increased over the years, many buyers are leaning toward conventional mortgages with 5% down, versus the 3.5% required by FHA. Conventional mortgage insurance monthly premiums are lower and there is no additional up front premium required.
I see the the benefit to the lender. Is there any benefit to a buyer? According to MGIC (a mortgage insurance provider) some benefits 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). o pay mortgage insurance?
- With low interest rates on mortgages, you may be able to invest the difference between the 20% down and a lower amount (If you qualify, you may be able to put down as little as 5% on a conventional loan!) and not only build your portfolio, but have easier access to liquid funds.
Is there any way around paying mortgage insurance?
The first and most obvious way to avoid mortgage insurance is to put down at least 20 percent on the property you are purchasing.
You may avoid the monthly mortgage insurance with Lender Paid Mortgage Insurance (LPMI), by paying a higher interest rate. You may also pay a lump sum at settlement using Borrower Paid Mortgage Insurance. Many companies also offer other options including part up front, part monthly, or possibly even financing the mortgage insurance into the loan.
Which type of mortgage insurance is best for me? It is important to review your situation with a qualified loan officer to determine your best option.
Some Questions to consider:
1. How long do you expect to be in the house?
2. Will the mortgage insurance be tax deductible? It may not be if your income exceeds certain limits, in this case, LPMI or BMPI may be a better choice.
3. How much money do I have, will I need?
4. Does it make more sense to wait to purchase until you can save the 20%?
5. How is your credit? Most MI companies have minimum credit scores required to qualify. FHA may be the best option if your credit score is low.
Does Mortgage Insurance Make Sense For Me? Talk to a mortgage professional to determine YOUR best options!
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