With regard to conventional financing, mortgage insurance is required when purchasing a home with less than a 20% down payment or when refinancing at greater than 80% loan to value. There are five available options for mortgage insurance. Choosing the right mortgage insurance option is critical to minimizing ones "MI" expense. Not all lenders offer all five choices so make sure that your lender offers the best option for you.
Making the "right choice" among the five options depends largely on three factors based on ones individual circumstances. The three factors are:
1) One's income level at the time the property is financed as well as the expected income level during the foreseeable future.
2) One's expected holding period for the real estate.
3) One's availability of funds that exceed the down payment and closing costs that are required.
The five MI options are as follows:
1) One-Time PMI: Entire premium is paid at closing so, no monthly MI payments. This option offers lowest overall cost but requires cash up front. This is not tax deductable for income greater than $109,000
2) Standard Monthly PMI: Monthly mortgage insurance is paid until loan reaches 78 to 80% loan to value. This is the most costly on a monthly basis but may be the best option if one plans to pay down the loan to 80% of value quickly, thereby eliminating the payment. This payment is not tax deductable for income greater than $109,000
3) Financed/Single Premium MI: Entire MI premium is added to the base loan amount so no monthly MI payments. This option is less expensive on a monthly basis than the standard monthly, but may require additional cash up front because the overall loan to value must remain below the required level based on product and pricing eligibility. Since the upfront cost is added to the mortgage, the interest portion of the additional cost is tax deductable for income greater than $109,000.
4) Lender Paid Single Premium: MI premium is paid by the lender: Borrower is charged additional discount points to cover the upfront expense. Overall cost is very low like the up front single premium, but because the upfront cost is considered Discount Points as opposed to Mortgage Insurance, the cost may be tax deductable, and therefore may be the better option for those with income exceeding $109,000.
5) Lender Funded Monthly: The MI premium is paid by the lender; The borrower pays a higher interest rate in exchange for no monthly mortgage insurance payments. This results in lower monthly expense than the Standard Monthly MI with the advantage of it being tax deductable for income over $109,ooo. The disadvantage is that the add on to the interest rate will not go away when the Loan to Value reaches 80%.
A simplified comparison offers an example of the difference in overall costs between the Single Upfront Premium vs. the Standard Monthly MI for a loan of $200,000 with a 5% downpayment and a 720 credit score. The overall cost for the standard monthly until the loan reaches 78% LTV would be roughly $17,000. The upfront single premium would be roughly $4,500. These savings are dramatic, but not everyone can benefit. Make sure your loan originator can direct you to the best option based on your individual circumstances outlined above.
By: Jonathan Rodd, Mortgage Advisor with Century 21 Mortgage; Jonathan.Rodd@MortgageFamily.com; 802-683-0812