Private mortgage insurance is added to the monthly payment of a conventional loan if you put less than 20% down on the purchase of a new home, or have less than 20% equity on the refinance of your home. The amount to be paid will depend on your credit score, the amount of down payment or equity in the home, the purpose for which you are purchasing the home, i.e. primary residence, second home or investment property, and what you are purchasing, e.g. condo or single-family residence.
Mortgage insurance can be paid by the lender or by the borrower. If it is paid by the lender, the interest rate would be higher than if paid by the borrower.
You are purchasing a single-family home for $250,000, with 10% down payment. It will be your primary residence and you have excellent credit. Let’s assume you are applying for a 30-year fixed mortgage at 4.5%. The monthly principal and interest payment on a $225,000 loan is $1,140.04. Here are a couple scenarios:
1. Borrower paid mortgage insurance: this is where the borrower pays the mortgage insurance monthly with his mortgage payment. The borrower would pay $56.25 per month in addition to his principal and interest payment.
2. Lender paid mortgage insurance: this is where the lender pays the mortgage insurance by increasing the rate. In this example, the rate would be 4.875%, thereby increasing the monthly principal and interest payment to $1,190.72.
As you can see, the increase in the monthly payment on the lender paid mortgage insurance is almost the same as the amount of the borrower paid mortgage insurance. The difference is that mortgage insurance can be removed when you pay it monthly, however it stays for the life of the loan if it is lender paid. In this example, it may be better to go with the borrower paid mortgage insurance. However, each scenario is different.
Contact us and we can help you decide how to finance mortgage insurance.
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