What You Don’t Know About Mortgage Insurance (and How it Affects Your Monthly Budget!)
When you think of a mortgage, you think of the money you pay each month towards your home loan, right? Yes, this is totally true, BUT a mortgage payment includes more than just paying towards the amount of money that was initially borrowed. Mortgages consisted of what we call PITI — Principle, Interest, Taxes, and Homeowners Insurance. It can also include an additional payment for mortgage insurance (aka PMI) if you are borrowing more than 80% of the value of your home/purchase price.
PMI is an insurance policy that is collected that helps the Bank recoup some of their financial investment in the event their borrower stops making their mortgage payments and the house goes into foreclosure. It has become way more prevalent since the “Great Recession”. According to the latest study done by the Urban Institute approximately 48.8% percent of agency (Fannie Mae, Freddie Mac, FHA, or VA)mortgages done in 2016 had mortgage insurance.
So while the principal amount loaned and the potential interest rate on that loan are often in the forefront of homebuyers minds, I’m here to tell you that your mortgage insurance can actually make a bigger impact on your monthly payment than your interest rate.
Typical scenario: home buyer reaches out to a call center asking for a quote on a 30 year fixed rate mortgage at the lowest interest rate possible. Call center presents the lowest rate possible with buying points. Call center does not take the most important piece of the puzzle into consideration: your unique financial situation.
**To keep us all on the same page, “buying points” are what lenders will offer you, the borrower, to bring down your monthly payment by decreasing the interest rate on your loan. Anyone can buy them, but you’ll pay the lender a one-time fee as part of your closing costs. Think of it as “buying down your interest.”
It’s extremely rare that you will get a home loan analysis that compares a variety of different mortgage products. But quite honestly, if you don’t — red flag! Do not pass go do not collect 200 dollars.
Presenting options based on different mortgage insurance factors is an important step in applying for a loan. Let’s break it down and take a closer look…
The biggest three things that affect potential mortgage insurance options are your,
Debt to income ratio
Loan to value ratio
And there are four ways to proceed after mortgage insurance comparisons,
Monthly Payments – determined by the lender based on the above
Upfront Purchase – the option to buy out the price of mortgage insurance upfront, rather than in a monthly payment
Hybrid – Pay a certain percentage to bring down the monthly payment
Government programs – Subsidized Mortgage Insurance (interest rates are higher, but the mortgage insurance is a lot less)
Let’s take a look at the difference in a few mortgage insurance rates based on credit score,
***Please note these are just examples and NOT QUOTES for mortgage insurance***
Example A – $200,000 loan with 680 credit score
A monthly premium for mortgage insurance would be around $200/month
To buy it out completely is 3.68% would be about $7360
Pursuing a hybrid approach would be about $2000 and this bring payments down to $168/month
Example B – $200,000 loan with a 740 credit score
A monthly premium for mortgage insurance would be about $116/months
To buy it out completely would be about $4300 which is 2.19%
If you were to take a hybrid approach and buy it out at a half a percent, that would take the payment down to $103/month.
Example C – FHA Loan of $200,000 with a 680 Credit Score
If you do the minimum down program, the mortgage insurance payment stays with the loan for the life of the loan. No exceptions.
An upfront premium is included that is financed into the home loan, so you do lose a little bit of equity
Interest rates are a quarter to a half percent lower than a conventional loan (this is maybe a $60 savings)
Mortgage premium would be $141/month for the lifetime of the loan.
Make sense? Sometimes it might feel like 1,472 new terms are being thrown at you as you’re preparing to buy a home, but if you keep educated yourself one thing at a time, I promise you will have so much more peace of mind when you purchase your home. (not to mention some possible extra dollars in your monthly budget, too!)
The home buying experience is not a one size fits all gig! You need options that take your lifestyle, preferences, and financial history into account before you make a big decision like taking on a home loan. My team is committed to presenting at least three of four options to you to help you make the very best decision possible!
What questions do you have in regards to mortgage insurance? I want to hear it all! Please let me know in the comments below!