What is mortgage insurance?
Lenders typically require mortgage insurance for loans with less than 20 percent equity or down payment. The most common types of mortgage insurance options are provided by either the Federal Housing Administration (FHA) or private companies. As payment for that risk, the insurer collects a premium from the lender, who then typically recovers the cost of the premium from the borrower.
The four types of mortgage insurance available include:
Monthly—an additional premium paid monthly and added on to your mortgage payment.
Single—a lump sum paid up front or financed on top of the loan.
Split—a combination of single and monthly.
LPMI—insurance that is built into the rate but typically offers the lowest payment.
One size does not fit all. You should consider that private mortgage insurance is available on a wider variety of loan products, and typically may be cancelled sooner than FHA mortgage insurance (in many cases, due to the recent changes, FHA mortgage insurance cannot be cancelled at all). LPMI is not cancellable. The key is to decide on your short- and long-term goals and structure the mortgage insurance around your game plan. On purchase transactions, sellers may offer concessions that may be used to offset mortgage insurance costs and allow you a no-cost option to buy out the mortgage insurance.
Financing with mortgage insurance creates opportunities for you in many ways such as:
● Increased buying power. Because private mortgage insurance makes it possible to a buy home with less than 20 percent down:
o Home buyers—especially first-time home buyers—can reach down payment savings goals faster and become home owners sooner than otherwise possible.
o Move-up buyers are able to consider a wider range of homes and leverage their investment in their current home.
● Expanded cash-flow options. Borrowers can benefit by putting less money down and keeping cash for other uses: making investments, paying off debt, or paying for home improvements or emergencies.
● Lower monthly payments. Private-company mortgage insurance premiums are usually lower than FHA’s and have more options available. That translates to lower monthly mortgage insurance costs and often monthly mortgage payments that are less than borrowers would receive with FHA financing.
● Secure, competitive, predictable monthly payments. A fixed-rate mortgage with monthly mortgage insurance provides borrowers with a locked-in monthly payment that will not increase and that will be reduced when mortgage insurance is cancelled.
● Private mortgage insurance may be cancelled. On most loans with private mortgage insurance, coverage must automatically be cancelled by the lender when the loan reaches 78 percent of original value through amortization. Private mortgage insurance also may be cancelled when extra payments bring the loan below 80 percent of original value. Borrowers may also request that private mortgage insurance be cancelled based on a new appraised value. The mortgage servicer should be contacted to find out their policies and guidelines.
● Reduced taxes. Borrower-paid mortgage insurance premiums paid in 2014 were tax deductible and extended in 2015, but limited to income phase-outs. LPMI may be fully deductible. The deduction is not restricted to first-time homebuyers.
The takeaway: Mortgage insurance is a great financing tool. You can buy a home for a low down payment or refinance with a small amount of equity using mortgage insurance. The key is to pick the best mortgage insurance option for your financial circumstance.
Carl Guzman, NMLS# 65291, CPA, is the Founder and President of Greenback Capital Mortgage Corp. He is a residential financing expert, and a deal maker with over 25 years’ experience. Carl and his team will help you get the best mortgage financing for your situation and his advice will save you thousands!
By Carl Guzman