Wednesday, January 30, 2013

Mortgage Insurance - why or why not?

Mortgage Insurance - why or why not?

Let's start by defining what Mortgage Insurance is all about.  Mortgage Insurance is charged to a borrower, so if the loan must be foreclosed, the lender will be compensated for their loss.  Only loans with a downpayment of less than 20% are required to have Mortgage Insurance.

Mortgage Insurance can vary from about 1.0% to 1.25%.  Some types of policies (i.e. FHA) have upfront mortgage insurance of about 1.75%.  Here is an example:

FHA Example

$250,000     Home Purchase
$    8,750     3.5% Down Payment
$    4,250     1.75 Up Front Mortgage Insurance
$    4,000     Closing Costs and Prepaid Finance Charges
------------
$240,000 Loan Amount

$1,044.50     30 year fixed Principal & Interest Payment @ 3.25%
$     70.00     Homeowners Insurance
$   150.00     Property Taxes
$   250.00     Morgage Insurance
------------
$1,514.50     Total


But now there are programs that build the Mortgage Insurance into the rate.

Conventional Example

$250,000       Home Purchase
$  12,500      5% Down Payment
$    4,000      Closing Costs and Prepaid Finance Charges
------------
$237,500  Loan Amount

$1,168.36     30 year fixed Principal & Interest Payment @ 4.25%
$       70.00     Homeowners Insurance
$     150.00     Property Taxes
------------ 
$1,388.36       Total

So, even with a higher rate, the payment is lower for Conventional Loans with built in Mortgage Insurance.  But, with Mortgage Insurance NOT built-in, the Mortgage Insurance can be eliminted with enough equity built from appreciation (20-25%) after five years.

There are a lot of factors to consider when choosing Mortgage Insurance products or built-in alternatives.  Please contact me anytime to discuss your particular circumstance.

Brent A. Wood
All Western Mortgage
702 629 9555
bwood@allwestern.com