Mortgage insurance options

November 24th, 2010

If you are applying for a mortgage, whether for a new home loan or a refinance mortgage, and have less than 20 percent equity you will need mortgage insurance. Mortgage calculators and most lenders when preparing quotes for mortgage insurance typically only show you payments for paying mortgage insurance monthly. Conventional mortgages that require mortgage insurance have several options for you to choose from if your mortgage transaction requires mortgage insurance.

FHA vs. conventional mortgages

Unlike FHA mortgages, not all conventional mortgages require mortgage insurance, only those conventional mortgages where the loan to value (LTV) exceeds 80 percent. With FHA mortgages you will have two mortgage insurance premiums, or split mortgage insurance.

FHA mortgages have an upfront premium of 1 percent of the loan amount (which is added to your loan) and a monthly mortgage insurance premium of either 0.9 percent or 0.85 percent depending on your down payment and equity. The monthly premium must be paid for a minimum of five years and your mortgage balance must be paid down to 78 percent of the value of the property at the time the mortgage was funded.

Most conventional mortgage insurance premiums must be paid for a minimum of two years and the mortgage balance must be below 80 percent loan to value. Unlike FHA where the insurance is provided through the Department of Housing and Urban Development (HUD), conventional mortgage insurance is provided by private insurance companies; hence the label private mortgage insurance, or PMI.

With PMI borrowers have several premium options from which to choose.

Borrower-paid insurance

The most common PMI premium is borrower-paid mortgage insurance, or BPMI. Your premium depends on your LTV; the higher your LTV the higher the premium. With BPMI you pay every month until you petition your lender to remove the insurance premium. Over a period of five years the BPMI will have the highest total cost, assuming your LTV requires you to pay the premium for the full five years.

Single premium

Like the FHA, PMI offers an option for an upfront premium that can be financed as part of your mortgage. Rather than being paid monthly, the single PMI premium is added to your mortgage and your mortgage insurance is paid at closing. There are two options with the finance PMI premium, refundable and non-refundable. If you choose the refundable option you will have a higher premium.

Of the options available for PMI the single premium is the lowest total mortgage insurance premium over a period of five years. What can make the premium even lower for you is that it need not be financed; either you or another "acceptable source" may pay the premium. "Acceptable source" includes the seller if you are getting a new home loan, or the agents representing the buyer and the seller.

Split premium

Similar to the FHA, PMI companies offer a split premium option, or split-MI. A portion of your premium is paid up-front, typically added to your mortgage balance, and the rest of the premium is paid monthly. Using this option allows you to lower your monthly housing payment by lowering your monthly PMI payment. Since the split-MI option is a hybrid of the single premium and the BPMI the total premiums paid in the first five years is between the lowest (single premium) and the highest (BPMI).

Lender-paid insurance

Besides having the seller or other "acceptable source" pay your single premium option, there is another option for mortgage insurance with no premium, the LPMI or lender paid mortgage insurance option. With this option the lender pays your mortgage insurance premium.

Of course, the lender is not paying the premium out of sheer kindness, you pay the premium through a higher interest rate charged by the lender. Some high-income borrowers who are not eligible to deduct mortgage insurance premiums from their federal income tax prefer this option as they may be eligible to deduct the higher interest rate.

Which option is best?

Many borrowers pay the most expensive long-term option, the monthly premium option. Besides taking advantage of lower upfront costs, many borrowers feel they will be able to lift the mortgage insurance premium in the future when their home value goes up. Looking at the five-year comparisons however and the current housing markets it may not be the best option for your needs.

Using mortgage calculators to determine your mortgage options is wise; ask your lender for mortgage insurance premium options as well.

Posted By :
Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years' experience in the mortgage industry.

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