For consumers purchasing or refinancing a home with less than 20% equity, little-known fee inflates the monthly outlay. Mortgage insurance is paid by the the homeowner for the benefit of the lender to ensure the lender against future payment default. Mortgage insurance, also dubbed as PMI (an acronym for private mortgage insurance), can be easily be several hundred dollars per month hingent on loan program. This added premium makes the cost of home ownership more expensive.
Few Mortgage Insurance Facts:
Loan To Value (LTV)
*LTV is the amount of money being lent against the value of the house. Computed by using loan amount ÷ home value = Loan To Value, a critical adjuster in home lending.
When Refinancing
- Must be removed by the the lender by law at 75% loan to value/25% home-equity
- May be removed by the lender at 80% loan to value/20% home-equity (subject to individual mortgage company discretion)
- Loan can be refinanced anytime if request to remove mortgage insurance by consumer is denied by lender
When Buying A House
- Mortgage insurance will be required with less than 20% down, every time
- Average monthly mortgage insurance amount based on 70 basis points of the loan amount, e.g on a $200,000 loan that’s $1400 per year , $116.17 per month respectively
- More money down creates lower loan to value, lowering amount of basis points for determining mi calculation, thus reducing mortgage insurance payment
What Is Single Pay Mortgage Insurance Anyway?
In short, yep you guessed it, an added fee, but with a favorable cost-benefit……
Most people hate the idea of paying an extra monthly fee without any direct benefit. Consumers don’t directly receive a benefit from paying mortgage insurance (despite tax deductibility in some cases), other than the ability to secure lower equity type financing.
Single-pay mortgage insurance allows a consumer to pay upfront a portion of the future mortgage insurance premiums at a discount at closing rather than financing these monies into their house payment. This improves qualifying ability by means of a lower debt to income ratio, a lower monthly mortgage payment, and a longer term lower cost loan.
For example let’s say, a consumer is looking at a loan for $300,000, using 70 basis points of the loan amount to estimate monthly mortgage insurance, $175 per month or $2100 annually. $2100 over five years, adds up fast….. $10,500 to be exact!
The single-pay choice (using an average 1.75% of the loan amount) which would translate in this case to $5250 paid one time at closing. In other words, in exchange for more upfront overhead, the house payment is reduced by $175 per month. A consumer would recuperate these monies within just a hair over two years.
*To run the recapture- simply take $5,250 ÷ $175 per month, not too shabby right?
Single Pay Mortgage Insurance Pro’s & Cons
Pro’s
- Lower cost of funds
- Reduced total mortgage payment
- Expedient recuperate on savings
- Increases borrowing power
- No early payment penalty
Con’s
- Higher upfront overhead required, on average, 1.75% of the loan amount would be paid at closing (varies on per loan basis speak with reputable lender)
- Loan would have to be kept for at least the amount of time necessary to recuperate paying upfront overhead, paying off the loan early negates the benefit
- Not offered by all mortgage companies, ask your lender upfront if they offer single pay mortgage insurance as an option to keeping new payment lower
Consumer Tip: *Further requirements include a middle credit score of least 700 or higher, primary home or secondary home financing only, a max 45% debt to income ratio and an approval from the lender.
Single Pay Mortgage insurance offers consumers a more flexible way to secure loan financing and keep the long-term mortgage payment more manageable against the household budget. If folks have the equity or cash available, single-pay mortgage insurance makes securing higher loan-to-value financing more manageable as a PMI payment would never be required.
Obtaining a mortgage loan is no easy endeavor, but with the right programs, a knowledgeable loan officer working for your benefit, you’re outcome is much more in line with your lending goals and expectations. You can begin by finding a competitive mortgage rate quote for your loan today.
