By Adam Walman
As most people know, when you buy a home and do not have sufficient funds to put 20% down, you will be required to pay mortgage insurance. Mortgage Insurance was created to decrease the barrier of entry for 1st Time Buyers and buyers in general with limited funds. Mortgage Insurance, or PMI (private mortgage insurance) as it’s better known as – has long been considered a dirty word. The function of PMI is that it provides a financial guaranty that reduces the loss (and as a result, risk) to the lender in the event the borrowers do not repay their mortgage.
FHA and USDA both have their version mortgage insurance. They both have an up-front premium that is typically financed into the loan. And an annual amount that is paid monthly. A very important distinction between mortgage insurance on FHA & USDA loans versus PMI on Conventional loans is that Conventional PMI is cancellable. USDA mortgage insurance is for the life of the loan and FHA mortgage insurance is only cancellable if you put down more than 10%.
Everything having to do with mortgages is about risk. Credit score, loan-to-value, interest rates, loan programs, all are impacted by the level of risk a loan has. Mortgage insurance provides reduced risk exposure and enhances the quality of the mortgage as an asset. It becomes a safer investment for lenders who keep their loans in a portfolio and for investors and servicers looking for secure purchases. If the borrowers fail to repay the loan, the lender/investor doesn’t suffer a complete loss, but rather shares the loss with the mortgage insurer.
Why is PMI important and potentially beneficial to you if you are a buyer? We’ve already established it lowers a risk factor by protecting the lender. Let’s look at ways this may positively impact you and your transaction…
- It might allow you to get a lower rate. Not dramatically, lower, but every little bit helps. You have lowered the lender’s risk, and in return, they may give you a lower rate depending on some of the other details of your transaction.
- If you have the ability to put 20% down, but choose instead to put 10% down (or even 5% down), with reasonably good credit, you keep thousands in the bank or use the funds you didn’t put into the transaction to make your new house a home (and you don’t put those purchases on credit). Or you can invest that money and with rates at or close to historic lows, you could potentially earn a higher rate of interest that you are paying on your mortgage.
- Due to where mortgage rates are these days, monthly payments are not dramatically higher even though you have to pay PMI and a higher loan amount. This increases your buying power for the home you may not have been able to afford before.
- There are several types of mortgage insurance on a conventional loan. You don’t always have to pay a monthly premium. You can pay a one-time premium at closing, or you may be able to finance the one-time premium into your loan (at low-interest rates). Your lender can pay it for you on your behalf.
It is important your loan officer reviews not only the various loan types with you but also goes over your mortgage insurance options so you can make a fully informed decision. Please don’t hesitate to reach out with mortgage financing questions. I would be happy to assist.