What is mortgage insurance?
Mortgage insurance, or MI, gives eligible homebuyers the flexibility of making a smaller down payment by lowering the risk to the lender originating the loan. Without mortgage insurance protection, lenders normally require a borrower to make a down payment of at least 20% of the home’s sales price. Many first-time homebuyers struggle to save up that much money. With MI, down payments can be as low as 3% for those who qualify, making buying a home possible. If you don’t want to wait to buy your dream home, you can get a low down payment option loan using MI.
What kind of mortgage insurance is available?
- LPMI – Lender Paid Mortgage Insurance describes a scenario where your mortgage lender covers the cost of your mortgage insurance. Lender-paid mortgage insurance builds the cost of covering your insurance into the mortgage rate.
- BPMI – Borrower Paid Mortgage Insurance is a monthly premium added to your mortgage payment purchased through a third-party vendor specializing in mortgage insurance.
Benefits of LPMI include:
- The extra mortgage interest LPMI lenders charge might be less than a comparable monthly mortgage insurance premium.
- If you itemize your deductions on your tax returns, you can deduct the cost of the increased interest lenders charge you for covering LPMI through the mortgage interest deduction*.
- Your monthly payment might be more affordable because the cost of the mortgage insurance is spread out over the entire loan term.
- Lender Paid MI is only cancelable if you sell the home or refinance into a new loan with at least 20% equity.
Benefits of BPMI include:
One key benefit of Borrower Paid MI is that it cancels once a borrower has built enough equity, resulting in lower monthly payments over time.
For borrower paid MI, the Homeowners Protection Act (HPA) of 1998 requires lenders to cancel MI when the loan amortizes to 78% of the home’s original value, subject to certain conditions. One condition is that the borrower must be current on their mortgage payments.
Additional requirements to cancel BPMI include:
- The value of the property has not declined below the original value.
- The borrower’s equity is not subject to a subordinate line.
Consider your buying power if you have $20,000 for a down payment and your income supports a larger loan amount.
| Without MI | With MI | |
|---|---|---|
| You can make a 20% down payment on a home valued at $100,000 | You can make a 10% down payment on a home valued at $200,000 | You can make a 5% down payment on a home valued at $400,000 |
To figure out which option is best for you, contact one of our loan officers. If you’re determined to buy a home sooner rather than later and can’t afford the standard down payment, lender-paid mortgage insurance can help you. But carefully consider how long you plan to stay in your home and the long-term cost of a loan with a higher interest rate before settling on this option. In some cases, borrower-paid mortgage insurance could be a better choice.
*For tax advice, contact a tax accountant or other professional.
