As new homebuyers are entering the current, higher-cost real estate market, they are opting to come in with less than the typical down payment of 20%.
What many potential buyers are not aware of is if they contribute less than 20% down payment, they can still get qualified for a mortgage but will need mortgage insurance. The most common mortgage insurance option is Borrower-Paid or Monthly Mortgage insurance. Each month you pay an additional amount on your mortgage payment in addition to your principal and interest payment.
The amount of monthly mortgage insurance will vary depending on the down payment, FICO score and what the borrower’s debt-to-income (DTI) ratio looks like. The mortgage insurance will “fall off” once the LTV reaches 78%.
Another common option is Lender Paid Mortgage Insurance. With this option, the lender pays for the mortgage insurance by baking it into the interest rate. In some cases, this can result in a lower monthly payment than paying the mortgage insurance separately. A downside of this option is that the mortgage insurance stays attached to the mortgage for the life of the loan.
Single Premium Mortgage Insurance is an option where you pay the entirety of your mortgage insurance at closing. You may have the option to roll this premium into the loan amount. This option can help you lower your monthly mortgage payment. The disadvantage is you are incurring a cost right at closing. This premium is generally not refunded if you decide to sell or refinance.
FHA loans have upfront mortgage insurance which is similar to a single premium option. Currently, that upfront premium is 1.75% of your loan amount. In addition to this, FHA loans also have monthly mortgage insurance which remains attached to the mortgage for the entire term of the loan.
Depending on the loan amount, LTV, and term, the monthly mortgage insurance amount will vary and it may last for approximately 11 years or it may last for the entirety of the mortgage term.
If you refinance within the first three years, you will get a refund on the upfront mortgage insurance. The closer your refinance is to when you originally obtained your loan, the more of a refund you will receive. What option is best for you will depend on your specific situation and goals. Our goal at Bluefire Mortgage Group is to educate you on options so you can make an informed decision. We also offer some of the lowest mortgage insurance premium options in the industry. If you have any questions, feel free to reach out to discuss with one of our Mortgage Loan Originators at (760) 930-0569.
