How Mortgage Insurance Works

Posted 2 years, 2 months ago

For many homebuyers, the biggest hurdle to owning a home is the down payment. Private mortgage insurance, or private MI, can allow you to purchase a home with less down than what otherwise may be required.

Lenders and investors typically require mortgage insurance for loans with down payments of less than 20%. MI provides lenders a financial guaranty should a loan go into foreclosure. It is this guaranty that allows many lenders not to require a 20% down payment when making home loans.

Here's how it generally works:

• A borrower buying a $500,000 home makes a 10%, or $50,000, down payment.
• The lender then obtains private MI on the borrower's $450,000 mortgage, reducing its exposure to loss from $450,000 to $337,500.
• 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 $112,500, of any ultimate loss to the lender.

Benefits of Mortgage Insurance

While MI provides an obvious benefit to lenders, many times homebuyers will overlook the benefits MI affords them.  These can be significant and may include:

• 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.
• Expanded cash-flow options – you may put less down and keep cash for other uses (making investments, paying off debt, or paying for home improvements or emergencies).

Different Types of Mortgage Insurance

Monthly Premiums

With this option, the premium amount is paid along with your monthly mortgage payment. Your MI coverage can usually be cancelled once your loan amount falls to 78-80% of your home's value.

Single Installment

Borrowers also have the option of paying the MI premium in one lump sum at closing and making no monthly MI payments.

Lender-Paid Mortgage Insurance

As the name suggests, with Lender-Paid MI, your lender pays the MI premium and not you. However, to cover the cost of the premium, your lender may increase the loan fees or the interest rate.

The important thing to remember is that mortgage insurance gives you options. Buying a home is one of the biggest financial decisions you may ever make.  You want to go into that decision knowing all your options. Feel free to call to review your specific situation.

Sincerely,

-The Kavanewsky Team

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