Mortgage insurance, it doesn’t benefit homeowners.
With the government forcing homeowners to pay mortgage insurance for the life of an FHA loan, there has to be a better option. FHA loans are notorious for being the first time buyer ticket to getting into a home. Your credit doesn’t need to be perfect, you only need 3.5% of out of pocket money for a down payment, and the rates are low. However the costs you will incur over the first 5 years are astronomical.
As of a few months ago, HUD decided to adjust their guidelines for any new loans written. You will continue to pay the upfront mortgage insurance premium and you will pay monthly mortgage insurance as well. Before the change you were required to pay the mortgage insurance until your home reached a specific loan amount. Now you will pay mortgage insurance for the life of the loan. For example, on a $200,000 home purchase you will pay a monthly mortgage insurance premium of $216.67 a month. Amortized over 30 years and you have sacrificed $78,001.20 of your hard earned money. Tack on the up front mortgage insurance premium and you are over $80,000 invested into your home that has nothing to do with paying the mortgage off.
If you’re required to pay mortgage insurance know your options. There are three types of mortgage insurance programs available to consumers: monthly premium, single premium, and lender paid premium. Each option can impact your pocket differently, but each will offer a much cheaper solution.
Paying a monthly mortgage insurance premium is beneficial in certain situations. Similar to FHA loans, you pay a monthly premium that is included in your mortgage payment. You will pay this premium on a monthly basis until your loan balance reaches 78% of the appraised value or by requesting the lender to drop the premium. To eliminate mortgage insurance early, the servicer would require a home appraisal of some sort to verify the value. Typically you’re required to carry monthly mortgage insurance for a minimum of two years before you can request to have it removed.
Single premium mortgage insurance gives homeowners the opportunity to pay the lump sum mortgage insurance premium up front at the completion of a purchase or refinance transaction. The benefit of this option is that because you’re paying a lump sum, the cost is much less, compared to the amount of money that is paid for monthly mortgage insurance. For example, you may pay $13,000 in monthly mortgage insurance over the life of your loan. With the single premium option you may only pay $6,000. Which would you rather pay?
Lender paid mortgage insurance is the third option. This is when the lender pays the mortgage insurance for you. So the good news is there is no monthly payment nor is there a single premium lump sum payment. The bad news is that your interest rate is affected. With this option you can take a higher than market interest rate and have no mortgage insurance.
At the end of the day you have to weigh your options and see which option is most cost effective for you.