What is Mortgage Insurance and Why is it Required On Home Loans Over 80%?
Mortgage insurance is protection for the lender (not the borrower) in the event of default. The mortgage insurance company will reimburse the lender for all or part of the losses they may have if the home is foreclosed on and must be sold by the lender. If your down payment is less than 20 percent most lenders will require that you purchase mortgage insurance. Although mortgage insurance is primarily for the benefit of the lender, it does allow home buyers to purchase their home with a low down payment. The borrower pays the mortgage insurance premium on behalf of the lender.
There are multiple different mortgage insurance options. Here are a few examples for those who can purchase a home with Conventional financing. The first option, the buyer can purchase a one-time premium that they pay upfront. If they don’t have the ability to purchase the premium upfront, they can then do a monthly premium. (This is the most common type of mortgage insurance). Another choice is split-premium insurance. This is where the buyer can finance part, or pay it upfront, and have a lower monthly premium.
Those who may not qualify for a Conventional loan may qualify for an FHA loan instead. FHA loans have an upfront premium of 1.75% and a monthly premium of 1.35%.
Here is an example of four different loan programs, with different mortgage insurance premiums:
| FHA Financing 3.5% Down | Conventional Financing with 3% Down-MI paid Upfront | Conventional Financing with 3% Down-MI paid Monthly | Conventional Financing with 3% Down-MI split-premium |
| Purchase Price: $275,000 | Purchase Price $275,000 | Purchase Price: $275,000 | Purchase Price: $275,000 |
| Down Payment: $9,625 | Down Payment: $8,250 + MI paid upfront $7,602 | Down Payment: $8,250 | Down Payment: $8,250 + .75 paid upfront |
| Loan Amount: $270,019 (with 1.75% financed) | Loan Amount: $266,750 | Loan Amount: $266,750 | Loan Amount: $264,688 |
| Rate: 4.125% (with a 680+score) APR: 5.7% | Rate: 4.25% (MI factored at a 680 score)APR: | Rate: 4.25% (MI factored at a 680 score) | Rate: 4.25% (MI Factored at a 680 score) |
| Principle & Interest: $1,308.65 | Principle & Interest: $1,312.25 | Principle & Interest: $1,312.25 | Principle & Interest: $1,311.87 |
| Taxes + Insurance: $328.54 | Taxes & Insurance: $328.54 | Taxes & Insurance: $328.54 | Taxes & Insurance: $328.54 |
| Monthly MI: $296.21 | Monthly MI: $0 | Monthly MI: $171.16 | Monthly MI: $126.67 |
| Total Payment: $1,933.40 | Total Payment: $1,640.79 | Total Payment: $1,811.95 | Total Payment: $1,767.08 |
As you can see, the different programs and mortgage insurance options can help you as a buyer save money, and potentially qualify for a different home. Changing the MI can change the ratios to help someone qualify.
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