Many home buyers ask about mortgage insurance and ways to avoid it. First it is important to recognize that mortgage insurance allows home buyers to purchase a home with low down payments and with low interest rates. Its cost is well justified by its benefit.
The best way to reduce the cost of mortgage insurance is to have a high credit score. For a 95% conventional mortgage, the monthly premium with buyer paid monthly mortgage insurance can more than triple for a buyer with a 660 credit score compared to a buyer with a 780 credit score. Such a difference can change the price range of a home that a buyer can purchase.
Mortgage insurance offers home buyers different payment plans. Basically the buyer can pay monthly premiums, or the premium can be paid up front with rate premium. Additionally these options can be combined, partial monthly and partial with rate premium. These different payment choices affect the monthly payment.
The payment option with rate credit is called Lender Paid Mortgage Insurance (LPMI). With this option, the interest rate of your mortgage is increased and rate premium is used to pay the mortgage insurance. The overall monthly payment is typically lower than the total payment with borrower paid monthly mortgage insurance.
The catch with LPMI is that your mortgage interest rate remains the same throughout the mortgage. With the borrower paid option, the monthly mortgage insurance premium can eventually be stopped, once the required loan to value ratio is reached.
Mortgage insurance helps many home buyers purchase a home with a low down payment. Even though the benefit of mortgage insurance is acknowledged, home buyers should make an informed decision as to which payment option best fits their circumstances.
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