Will Mortgage Insurance Break You?

Will Mortgage Insurance Break You?

We always say, buying a house is a big deal. It’s such a big deal, that you deserve correct information. (Vs. all the MIS-information out there!) We talked with our preferred lenders and together we’ve been exposing common myths. Like the myth about having to have perfect credit to buy a house, or why the lowest interest rate isn’t always the best, and even how you can buy a house without a gigantic down payment. But there’s another myth we need to talk about…

Myth #4: Mortgage insurance is going to break your budget.

Not true. So, we just exposed myth #3 that you don’t need to have a 20% down payment to buy a house. One thing to remember in real estate is that nothing is free. If you have less than the “traditional” 20% down payment, that’s cool (see above!), but you’ll probably have to pay mortgage insurance. Mortgage insurance lowers the risk to the lender of making a loan for you, so you can qualify for a loan that you might not otherwise be able to get.

It’s true – paying mortgage insurance isn’t exactly amazing. BUT, it’s not the end of the world.

The fact is you can find a lot of options when it comes to mortgage insurance.

(Mortgage insurance is also commonly called MI or sometimes PMI.) It’s set up so that you can pay it monthly with your payment. (See line 2 in example below)

You could also have lender paid mortgage insurance. In exchange for you paying a slightly higher rate, the lender pays the mortgage insurance. For example, let’s pretend you qualify for the below programs buying a house for $180,000 with a 5% down payment. 

lender-paid-mi

The first option in this example (courtesy of Wells Fargo) is Lender Paid Mortgage Insurance (LPMI). The interest rate is higher than the other 2 examples at 4.125%. (Higher than the others but still not bad, imo.) Your monthly payment in this option is $828.76.

OR, you can pay the mortgage insurance yourself in the monthly payment, like in the 2nd example. Your rate is lower (but that’s not always better) but your monthly payment is the highest of these 3 options because of the mortgage insurance.

The 3rd option in the example above is a 5/1 ARM which means adjustable rate mortgage. Remind me to write a blog on that another day because it’s too complicated to get into on this post.

Another option (not pictured) is single pay premium.

This is where you pay one lump sum at closing which helps keep your monthly costs lower. In this example, you would have extra high closing costs to pay the MI up front. You could pay them out-of-pocket or use seller paid closing costs to offset the cost. But, on the flip side, your monthly payment will be lower, so you can afford to eat out once in a while.

These are just the more common examples of mortgage insurance solutions. Your loan officer will likely have other solutions to offer.

The moral of our story is that you should always talk to a professional to find out what solutions they have that best suit YOUR needs. Don’t let one of these (or any other) myths stand in your way!

 

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Heather Wright

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