Mortgages Explained: Mortgage Insurance Alternatives

by Mortgage Nerd on March 30, 2011 · 2 comments

If you are like most home owners you hate the idea of your hard earned money going down the drain with monthly mortgage insurance payments. And with so many homeowners defaulting on their mortgage payments over the last few years (google “housing crisis 2008 to 2011“) private mortgage insurance companies, and FHA alike, have raised their premiums for the monthly mortgage insurance payments.

As of the date of this blog post,  a $200,000 FHA 30 year mortgage has a  mortgage insurance payment of $150/month. For this same loan it will go up to $191.67/month after April 18th, 2011. That’s the equivalent of the lease payments on a brand new Toyota Camry!

Private mortgage insurance on a conventional loan works a little bit different in that it is determined by different characteristics of the loan such as the borrowers credit score and the loan to value ratio. For a 30 year fixed conventional loan at $200,000, with a borrower credit score of 740 and a down payment of 5%, the MI will be around$160/month.

The fact that you could either pay monthly mortgage insurance or lease a brand new car for the same price is reason enough to consider the following options to getting rid of monthly mortgage insurance.

Home Loans That Do NOT Require Mortgage Insurance

There are a few loan programs that do not require monthly mortgage insurance whether you have a 20% down payment or not.

USDA Rural Housing is one of those programs. It offers 100% financing and a 30 year fixed mortgage  for eligible home buyers looking to purchase a home that is located in an eligible rural area as defined by USDA.  The interest rates should be on par with those of FHA and because it doesn’t require monthly mortgage insurance it will have a lower monthly payment than both FHA and Conventional loan programs.

  • What’s the downside to the USDA loan? It requires a funding fee of 3.5% (can be financed to bring total financing to 103.5%) which means you start your home ownership experience “upside down” (owing more than your house is worth). If you are going to buy a home as a short term investment, the USDA loan is probably not for you.
  • Also worth mentioning: It has been rumored that the USDA is considering a monthly mortgage insurance requirement and that it could be implemented as soon as late summer.

The VA Home Loan is another 100% financing program that doesn’t require mortgage insurance and the funding fee is only 2.15% (this can vary depending on the characteristics of the loan and your status with the VA).

  • VA Requirement: If you aren’t a veteran or married to one, you aren’t going to qualify for this loan program. If you are a veteran you should request your certificate of eligibility before visiting with a loan officer.

Portfolio Lenders: A portfolio lender is one that doesn’t sell their loans on the secondary market and consequently doesn’t have to follow the guidelines of Fannie Mae and Freddie Mac. This also means that they usually won’t require mortgage insurance on any of their loan programs. US Bank is one example of a portfolio lender that will allow you to put just 10% down on a home purchase and won’t require any mortgage insurance.

  • Always a downside: Because portfolio lenders take a greater risk by not selling their loans off, they usually demand a higher interest rate.

More Mortgage Insurance Alternatives!

If you are not eligible for a USDA or VA home loan, don’t fret because there are still some other options for avoiding monthly mortgage insurance or at least lessening the pain on your wallet, without putting 20% down on a conventional loan. Here are a couple of other options to consider…

FHA 15 year loan with 10% down: Besides being a great way to build equity quickly FHA does not require any monthly mortgage insurance on an FHA 15 year mortgage when you put 10% down. On April 18th, 2011 that is going to change, but it’s only going to a factor of .25%. On a $200,000 loan that’s only $41.67/month, which is significantly less than the 30 year MI.

80/10 Mortgage: It’s true that the 80/20 and 80/15 mortgages are virtually non-existent but believe it or not, there are still some lenders that will give qualifying borrowers a 10% second mortgage so that they can have an 80% Conventional loan without mortgage insurance. The second will usually be a higher interest rate but 9 times out of 10 it will result in a lower mortgage payment. Take the savings to pay off the 2nd mortgage in 10 years instead of 30!

Lender-Paid Mortgage Insurance: For borrowers that wouldn’t be in their homes long enough to get rid of more traditional monthly MI, this can be a very good option. With this option, you can choose to take a higher interest rate and not pay monthly MI. For example, if the current rate on a Conventional 30 year fixed is 5.0%, you could choose the lender-paid  mortgage insurance(LPMI for short) and take a 5.5% rate. On a $200,000 loan the higher rate will raise your payments almost $63 but that is much cheaper than the $125 you would pay for monthly MI on a Conventional loan with 10% down.

Single Premium Mortgage Insurance: This is one of my favorite options for Conventional loans with less than 20% down . In a nutshell, it allows the borrowers to pay all of the mortgage insurance upfront at a huge discount. For example, on a $200,000 loan with 10% down, you would pay $2,500 at closing for the single premium mortgage insurance. The monthly mortgage insurance would be $103 for that same loan. It only takes 24 months of that $103 to add up to the single premium of $2,500. If you make minimum payments on this loan, it would take 7 years to get to a point where the monthly mortgage insurance premiums would drop off.  It’s kind of a no-brainer! Even more so if can negotiate that the seller pays it for you!

Conclusion

The bad news is that mortgage insurance is expensive and it can be a serious hassle to get rid of it once you have it. The good news is that there is a variety of ways to get a mortgage without it and without a huge 20% down payment. By just doing a little bit of homework you could save yourself thousands of dollars in just a few years. Make sure that when you are shopping for a mortgage that you ask your lender about all of the mortgage insurance alternatives mentioned in this article.

{ 1 comment… read it below or add one }

AbbyBarker25 September 5, 2011 at 3:51 am

Houses and cars are not cheap and not everyone is able to buy it. Nevertheless, credit loans was created to help different people in such kind of cases.

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