Mortgage Insurance Explained
Updated: Apr 1, 2019
The down payment is the biggest hurdle to owning a home for many home buyers. One option is private mortgage insurance, or private MI, which can allow you to purchase a home with less down than what otherwise may be required.
While lenders and investors typically require mortgage insurance for loans with down payments of less than 20%, MI gives them a financial guaranty should a loan go into foreclosure. This guaranty is what allows many lenders not to require a 20% down payment when making home loans.
In general, here's how it works:
A borrower buying a $400,000 home makes a 10%, or $40,000, down payment.
The lender then obtains private MI on the borrower's $360,000 mortgage, reducing its exposure to loss from $360,000 to $270,000.
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 $90,000, of any ultimate loss to the lender.
What are the benefits to home buyers?
Many times, home buyers will overlook the benefits that MI affords them and only see the benefit to lenders. However, home buyer benefits can be significant and may include:
Expanded cash-flow options – you can put less down and keep cash for other uses (making investments, paying off debt, paying for home improvements, or emergencies).
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.
Different types of Mortgage Insurance:
With monthly premiums, the premium amount is paid along with your monthly mortgage payment. Once your loan amount falls to 78-80% of your home's value, your MI coverage can usually be cancelled.
With single installment, borrowers have the option of paying the MI premium in one lump sum at closing and making no monthly MI payments.
With Lender-Paid MI, your lender pays the MI premium and not you. However, your lender may increase the loan fees or the interest rate to cover the cost of the premium.
Mortgage insurance gives you options, which helps to make one of the biggest financial decisions you may ever make, buying a home, a little bit easier. Please don’t hesitate to call us to review your specific situation.