Mortgage Insurance

Sometimes it’ll be referred to as MI or PMI by your loan officer or in some of the documentation you receive. Essentially, mortgage insurance is a product that mortgage lenders use, and agencies require, to mitigate the risk that comes from putting less than 20% down on your home loan.

It can be financed into the loan amount (monthly MI) or you can pay it in one lump sum at closing (upfront MI). Upfront is usually best if your credit is fairly good (over 700) and you are putting 10-15% down and, maybe the seller is giving a LARGE credit to your closing costs and you need to spend some money.

The mortgage insurance is expressed as a percentage of your loan amount called a factor. Monthly MI factor might look something like 0.53% which looks like this in numbers:

Sales price: $200,000 Down payment: 5% :: Loan amount: $190,000.

$190,000 x 0.53% = $1007 / 12months = $83.91/mo

With monthly mortgage insurance on a conventional loan, you will be required to pay until your principal balance of your loan drops below 78%.

Additionally, you pay this initial factor for the first 10 years of your loan and then the factor drops to .20% for the remainder of the loan until the balance gets to 78% of the initial loan amount/purchase price.

Of course, you can refinance your loan before that point in hopes that the value of your home has appreciated enough to get your loan to value under 80% so you no longer have to pay the mortgage insurance.

Here’s an example with up-front mortgage insurance:

Sales price: $200,000 Down payment: 15% :: Loan amount: $170,000.

$170,000 x 0.38% = $646 – this $646 would be added to the closing costs on your file and you would not pay monthly mortgage insurance for the life of the file.

The amount of mortgage insurance you pay is based on several factors: credit score, debt-to-income ratio, down payment amount, loan program, etc. It’s one of the last items we order on your file as the MI company who issues the certificate needs to have all the final figures nailed down in file to determine coverage and issue coverage.

Generally speaking, no MI company will issue you mortgage insurance if your credit score is below 680 – that’s their credit risk threshold. There are a couple of companies who will go down to 660, but it’s prohibitively expensive. Which is why many loan officers will recommend an FHA loan if you aren’t going to put a large amount down and have less than stellar credit.

FHA loans are loans that are partially backed by the government. Anyone who is buying their first home can use an FHA program to purchase as there are no income limits and the minimum credit score requirement is more generous than all other programs.

But remember the thread going through this whole site: if it’s a risk, you’re gonna pay for it.

In the case of FHA loans, if you opt for the run of the mill loan that most borrowers who opt for FHA loans use, you’re putting 3.5% down (high risk) and you have a credit score that is likely in the mid to low 600’s (high risk) so, FHA is gonna hit you twice – the monthly MI premium that FHA charges is .85% per month but they also charge an upfront MI fee of 1.75% of your loan amount. They charge this 1.75% upfront fee on all FHA purchase loans no matter what.

Below is the FHA breakdown of monthly MI factors depending on their main risk concerns – down payment amount and loan term (the MIP/bps column is the equivalent to the MI factor mentioned above. Just pop a decimal before the number and a percent sign after it and it’s the same thing):

There’s some tricky stuff to figuring the amount with FHA, so this is what the numbers look like:

Sales price: $200,000 Down payment: 3.5% :: Base loan amount: $193,000.

$193,000 x 1.75% (FHA Up-Front MI Premium) = $196,377.50 – this is the total loan amount and lenders round down.

$196,377 x 0.85% = $1669.20 / 12months = $139.10/mo in monthly mortgage insurance

As you can see in the Duration column of the above, the run of the mill FHA loan will charge this monthly mortgage insurance for the life of the loan. Again, you can refinance out of this if your home has appreciated in value enough to get you below 80% LTV or your credit has improved enough to qualify for affordable conventional mortgage insurance.

Finally, a note: mortgage insurance, whether it’s FHA or conventional, is tax deductible. Generally speaking, it’s only going to be really beneficial if you itemize your deductions over taking the standard deduction, but the option is still there.

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