Hilde's Mortgage Blog

Why mortgage insurance?

It is required on residential mortgage if the down payment is less then 20 percent. In essence, it helps minimize one of the barrier to homeownership - cash to close.

There are Government insured or guaranteed home loans (FHA, VA, HUD184, USDA-RD -- more details on those later) with no or very low down payments; and conventional loans which are insured via private mortgage insurance companies with down payment requirements as low as five percent of the sales price.

When selecting a conventional loan with private mortgage insurance requirement, there are several payment  plan options as illustrated below.

The figures used in above example are for illustration purpose only. Actual premium percentages may vary. Changes to those plans may occur without prior notice.

In comparing the monthly payments you'll notice a difference of over $100.00 in your monthly payments.

Several considerations need to be made prior to the final selection. One, very important one, is the source of the upfront portion. Unlike government loans, the upfront portion is not necessarily financeable (added to the loan balance). Acceptable sources are: borrowers own verified funds, seller paid or lender paid via premium pricing (higher interest rate) or a mix thereof.  

Other considerations are the the anticipated length you plan on keeping the home and the loan. If you select premium pricing to keep you monthly payment low, that interest rate will remain in effect until the loan is paid off. However, when certain loan to value ranges are met the mortgage insurance can be removed from the loan at a later time. The makes it important to understand the longterm consequences of each plan and how it might fit your personal longterm financing goals.

Stay tune for the next update where talk about deleting mortgage insurance from your loan.