To many people, the topic of mortgage insurance carries a negative connotation, but it shouldn’t. It has its place in the mortgage process and can benefit you as a consumer. There are three main types of mortgage insurance you need to be aware of.
The most common type is borrower-paid monthly mortgage insurance. This is where the monthly amount gets added to the principal and interest portion of your payment. You would then make that payment each month until you get to a 78% loan-to-value ratio.
The other type is single-premium financed mortgage insurance. This is where the lifetime costs of the mortgage insurance get financed into the loan amount. It keeps your interest rate the same, but it adds to the loan amount. This actually results in a lower monthly payment because you don’t have the interest rate at that higher amount each month.
The last type is lender-paid mortgage insurance. This is where the lender pays the lifetime cost of the mortgage insurance in exchange for you agreeing to a higher interest rate. A higher interest rate has a negative connotation with most consumers, but the reality is that it results in the lowest possible monthly payment, and it’s even lower once you consider the after-tax mortgage interest deduction. This is a good way to structure your loan, but not if you’re going to keep the loan for a very long time.
The benefit of the monthly mortgage insurance is that it can fall off once you get to the 78% loan-to-value ratio. If you finance it in as a lump sum into the loan amount or roll it into the interest rate, there’s nothing to fall off because it has already been factored in.
The rules to remove monthly insurance are pretty complicated, and which structure makes the most sense for you is largely dependent on your goals for your property.
My staff and I would be honored to help walk you through this, so if you have any more questions or know anyone looking to purchase a home in the next six months, please don’t hesitate to give us a call. we‘d love to speak with you!