The old adage when it came to getting a mortgage was that you absolutely had to have a 20% down payment. While this may have been true for our parents and grandparents, it’s no longer the case. In recent years, it’s been possible to get a home for as little as 3% down.
Of course, there are advantages to a higher down payment. Responsible lending is all about risk management. If you make a higher down payment, you can get a better rate because it means less risk for the lender if you have more invested upfront because you’re less likely to walk away. Another way lenders manage risk is through mortgage insurance.
Most loans with less than a 20% down payment or equity stake will require some form of mortgage insurance, but just because you need it doesn’t mean you should pay more than you have to. In fact, if you get a conventional loan with monthly borrower-paid mortgage insurance (BPMI) payments, Quicken Loans is offering very competitive, low monthly private mortgage insurance rates.
Whether you’re looking to buy or refinance, we’ll go over what a difference your mortgage insurance rate makes. Before we get into that, let’s get back to basics so you can cut through the terminology.
What’s Mortgage Insurance?
You may hear the term mortgage insurance thrown around when you’re going through the application process for your loan, but what is it and what does it cover?
Mortgage insurance is mandatory for most loans with less than a 20% down payment or amount of equity. In exchange for making a lower down payment, the mortgage insurance helps protect the lender in the event that something happens that causes you to default on your home.
Mortgage insurance comes in several different forms. The mortgage insurance on conventional loans from Fannie Mae or Freddie Mac is known as private mortgage insurance (PMI). There are also a couple of different types of PMI, but we’ll come back to that in a minute.
FHA loans have mortgage insurance rates that are set by the government and don’t change. Referred to as mortgage insurance premiums, or MIP, there are upfront premiums that are collected at closing or built in to the loan, as well as monthly mortgage insurance premiums.
If you make a down payment of 10% or more, mortgage insurance payments come off after 11 years even on FHA loans, but not everyone has this amount of savings. If your down payment is lower than that amount, you’ll have mortgage insurance payments on FHA loans for the life of the loan.
“Life of the loan” is a key phrase here. If you qualify, once you reach 20% equity, you can refinance out of an FHA (or any other loan that requires lifetime mortgage insurance) into a conventional loan and never pay mortgage insurance again. In some cases, it may make sense to do this sooner if you can get a lower mortgage insurance rate on a conventional option. Here’s more on ditching mortgage insurance altogether.
USDA loans have the equivalent of mortgage insurance in the form of upfront and monthly guarantee fees set by the government. These last for the life of the loan.
Finally, VA loans replace mortgage insurance with a one-time upfront funding fee. This can be rolled into the loan if you don’t want to pay it at closing.
There’s one important point to make before moving forward – although mortgage insurance is designed to limit the liability for a lender if you should default on your payments, it doesn’t pay off your mortgage payment if you pass away. It’s often confused with mortgage life insurance.
If you wish to get an insurance policy to pay off your mortgage so your family can stay in your home after you pass on, you can contact an insurance carrier to look into mortgage or general life insurance policies to accomplish your goal.
The Two Types of PMI
For the rest of this post, we’ll focus on understanding conventional PMI and exactly how it works, and we’ll show you how rates are calculated in order to show you the benefit of lower rates.
Before we go any further, let’s take a look at the two varieties of PMI: borrower-paid mortgage insurance (BPMI) and lender-paid mortgage insurance (LPMI) programs like PMI Advantage.
BPMI is pretty straightforward. You pay a flat fee every month for mortgage insurance until you reach 20% equity in your home.
The nice thing about BPMI is that you keep the same mortgage rate and you can request to stop paying for mortgage insurance when you reach 20% equity in your home, as long as you’re current on your mortgage payments and your property value hasn’t declined. In any case, it automatically comes off once you reach 22% equity.
LPMI programs like PMI Advantage allow you to avoid the monthly mortgage insurance payment in one of two ways.
You have the option of making a one-time payment at closing, during which you could pay for your mortgage insurance policy entirely and keep the same mortgage rate without having to pay an additional monthly fee.
In the second option, you can choose to take a higher rate (in comparison to a rate with BPMI), but you avoid a monthly payment altogether.
Finally, if you want to make a partial mortgage insurance payoff at closing, it’s possible to do this in a combination of the two approaches. Any of the options will leave you without a monthly mortgage insurance payment.
Calculating BPMI Payment
Your BPMI rate is based on the amount of your down payment, your credit score and the type of property you’re buying.
The following example is completely hypothetical, but it’ll give you an idea as to how your payment is calculated for mortgage insurance.
Let’s pretend you’re buying a primary property with a 3% down payment and a 745 FICO® credit score. For the sake of convenient math, we’re going to pretend the annual rate for that score is 0.60% of your loan amount. Let’s say you have a $200,000 loan.
To calculate your monthly payment, you would take 0.006 × $200,000 and divide by 12. The result you get is $100 per month for a mortgage insurance payment.
When it comes to fees, it’s absolutely understandable to want to pay as little as possible. That’s why it makes sense to go with a lender that offers low monthly private mortgage insurance rates that are very competitive.
Are you ready to get started? You can apply online through Rocket Mortgage ® by Quicken Loans. Otherwise, one of our Home Loan Experts would be happy to take your call at (888) 980-6716. If you have any questions, you can leave them in the comments below.
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