Every home buyer’s situation is different. Some people have 20% down (or more!) and mortgage insurance is not an issue. Others have very little money and need to figure out how to buy a home with less down. Mortgage insurance allows you to purchase a home with as little as 3% down on a conventional mortgage. There are different types of mortgage insurance and depending on your situation, it may be worth looking into the options.
Most home buyers use a monthly premium for mortgage insurance. In many cases it works well, the premium is paid every month until you have enough equity to eliminate MI. This can be a great way to buy if you are sensitive to interest rates and your housing market is appreciating. The premium will vary based on credit scores and down payment. The less down, typically the higher the payment. It will also vary based on your loan program. If you are using Home Ready or Home Possible, your MI rate will usually be lower. If you are using a state housing finance program like MN Housing, your rate will also be lower.
The other options are paid by the borrower in either a single premium paid at closing, a split premium or a lender paid mortgage insurance.
The single premium paid by the borrower is a one time payment, paid at closing. It is best suited to those that have excess funds at closing (maybe seller paid closing costs) and for those with higher credit scores and lower loan to values. The benefit to a single premium is your monthly payment is lower as the MI was paid at closing and is not part of your monthly mortgage payment.
The split premium paid by the borrower is a combination. There is an upfront premium due at closing and a monthly premium paid as part of your mortgage payment. This is best suited to those that have available funds at closing and it helps to reduce your mortgage payments and can help your debt to income ratio. For some, it can mean the difference between qualifying for your new home or not. Maybe you have a little bit of left over seller paid closing costs, it may be worth looking into a split premium MI to help lower your payment.
A lender paid mortgage insurance is another option. This allows the lender to pay the MI so you do not have a monthly payment but your interest rate is higher. Typically the lender increases the interest rate to cover the MI. Many don’t like to pay a higher interest rate, especially if they think they will keep that mortgage for a long time and their home may appreciate quickly.
Remember you can get rid of MI once you have enough equity in the home. Usually you need to keep MI for at least two years unless you pay the mortgage down below 80% of the original purchase price. After two years, it will depend on how much equity you have, along with the type of mortgage insurance you have. You may need to have an appraisal done to show you have enough equity in your home.
The biggest plus to mortgage insurance is it allows you to buy a home now and not have to save up the twenty percent!! There are also down payment assistance programs that help you buy with less down. Talk to your loan officer about your options and then you can decide on the best program for you.