Monthly Private Mortgage Insurance – It Doesn’t Make Any Sense. . .

Few know that there are more than 22 different types of private mortgage insurance that can be used what a homebuyer puts less than 20% down on a conventional loan.  Most assume they’ll be saddled with monthly mortgage insurance which, more often than not, makes the least mathematical sense.  A different application of private mortgage insurance to a conventional loan can reduce monthly payments, add tax advantages, increasing a homebuyer’s purchasing power and save many thousands of dollars.

As though there isn’t already enough to know, real estate professionals need to know the differences between the mortgage insurance providers (i.e. Radian, MGIC, Genworth, United Guaranty, Arch MI and others) and their various offerings.  They also must know the advantages and disadvantages of the different types of mortgage insurance.  For simplicity’s sake, let’s just mention lender paid mortgage insurance (LPMI), borrower paid monthly, split premium and single premium.  Sadly, if you look up mortgage insurance in most mortgage glossaries, you won’t even see split premium or single premium PMI and they often make more sense than LPMI and borrower paid monthly offerings and no mention is made of refundable PMI premiums vs. non-refundable versions.  This typifies the problem borrower’s face in today’s market.

Let’s start with the basics.  Here are some working definitions:

  1. Borrower Paid Monthly Mortgage Insurance– For this premium type, the cost of the monthly premium is rated by the loan to value and credit score.  The price, after being set, is typically constant and doesn’t decline with the remaining balance of the loan as FHA monthly insurance would.  Although guidelines vary between insurers and from state to state, typically, the monthly payment must be made for a minimum of 2 years and isn’t droppable until the borrower has a twenty percent equity position in their home.  For this to happen, many monthly payments and unreasonable expectations for rapid home value appreciation would be needed along with an appraisal documenting the 20 percent equity position (usually paid for by the homeowner and the appraiser is chosen by the lender).  For that reason, in this market, monthly mortgage insurance is almost always the worst of all choices.
  2. Lender Paid Mortgage Insurance– First one should know LPMI really is.  It’s basically an insurance premium that the lender pays on behalf of the borrower.  However, this is done by offering a higher than market rate (usually 0.375% higher than market).  The most common situation where this option is the best option is when the following things are simultaneously true:
  • None of the applicants are first time home buyers (a first time home buyer is someone who hasn’t owned a home in the last 3 years),
  • The credit score is 720 or higher and
  • The down payment is 5%
  1. Split Premium Mortgage Insurance– This is the newest of the offerings.  It works similarly to FHA mortgage insurance premiums.  A portion of the overall premium is paid up front (by a borrower or seller) or it can be financed into the loan and in exchange, the amount of monthly mortgage insurance is reduced.  Not all insurance providers offer this product and it really should only be used when single premium mortgage insurance is not an option due to excessive costs or something of that nature.
  2. Single Premium Mortgage Insurance– In most cases, with the exception listed under lender paid mortgage insurance above, this is the best option.  This is where there is a fee paid one time and it eliminates any and all monthly mortgage insurance and does not adversely affect the interest rate.  And that’s it.  One time and it’s gone (just like a VA loan).  In nearly all cases, where a borrower has a middle credit score of 680 or better and a 10% down payment or a credit score over 720 with a down payment of as little as 5% (assumptions apply to the market as of the date of this article), this premium will pay for itself in approximately 40 months.  Sometimes it takes a little longer and sometimes it takes less time to pay for itself but it’s usually approximately 37-42 months.  This single or one time premium can be paid by the borrower, a seller but in most cases it is financed into the loan.

Always ask your loan officer to shop for mortgage insurance.  This is a big one.  Aside from shortening the term of a mortgage from a 30 year loan to perhaps a 20 or 15 year term, the right PMI choice will save a homebuyer more money than anything else in the comparative loan shopping process.  Not only are there definite price differences between premium types but there are different prices between mortgage insurance providers.  Most home buyers spend less time shopping for a mortgage than they spend shopping for a car and they spend most of that time evaluating rates and closing costs when, often times, they’d save more money shopping for mortgage insurance.

It is a misconception that the mortgage broker, mortgage banker or banks dictate who the mortgage insurance company will be.  This is only partly true.  If a mortgage broker is arranging a loan for a borrower through say, Chase, they can request mortgage insurance from MGIC, Radian, United Guarantee, Essent, Arch MI and others.  A mortgage banker or correspondent lender is rarely only setup with one mortgage insurance company.  And rarely would a bank be captive to one insurer.  So, a homebuyer can and should insist that their loan officer shop PMI companies on their behalf.

A lot has changed in the housing market and those changes have changed the private mortgage insurance market… for the better.  Get to know your split and single premiums, shop for your private mortgage insurance and lose any belief that FHA is the low down payment loan of choice.

Click here to shop for private mortgage insurance using these online calculators!

Charles Dailey – 612.234.7283 – charles@charlesdailey.com – Branch Manager, Loan Officer, Certified Military Housing Specialist – Licensed in 12 States – NMLS ID# 79048

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