Single Premium Mortgage Insurance

by Mortgage Nerd on September 11, 2012 · 0 comments

Mortgage insurance is something that you buy for the lender so that they will give you a mortgage in the form of a conventional loan with less than a 20% down payment. I like to think of it as a necessary evil. Most people that have done a little research on getting a mortgage know about the mortgage insurance requirement. However, I have found that very few people know about a type of mortgage insurance called Single Premium Mortgage Insurance. We will discuss it in this blog post as I believe it can be a great way to save a lot of money over the long term.

What is Single Premium Mortgage Insurance?

First lets talk about the most common type of mortgage insurance. Most people think of mortgage insurance as a monthly fee that they pay as part of their full monthly mortgage payment.  This monthly fee is paid until a 20% equity position is reached in the home and the mortgage insurance is removed by the lender (Suppose to be removed). With only a 5% down payment, this can take about 7 years making minimum payments.

Depending on your credit score, debt to income ratio, and loan to value, this monthly mortgage insurance fee could be anywhere from .6 to .9% annually. This is a fee of $50 to $75 per month for a loan amount of $100,000. If you only put 5% down it will be closer to .9%, and if you only make minimum payments, you will have to pay this mortgage insurance for about 7 years or more before you have the required equity position to get rid of it.

Single Premium Mortgage Insurance is a one time fee that you pay at closing to essentially buy out of the monthly fee. By paying this one time fee you are done with mortgage insurance for the life of the loan.

How much does it cost?

The cost is determined again by your credit score, debt to income, and loan to value.  With 5% down, it could be anywhere from 1.5% to 2.5% of the loan amount. On a loan amount of $200,000 that would be a costs of $3,000 to $5,000.

The way I see it is this…On a loan amount of $200,000 the monthly mortgage insurance might be anywhere from $100 to $150 per month. Again you would pay this for at least 7 years if you make minimum payments and only put 5% down. With a best case scenario you would pay approximately $8,400 over 7 years.  Or you could pay $3,000 up front and be done with it.  If an financial planner told me that I could invest $3,000 today and have $8,400 in 7 years guaranteed, I would call him a liar.

When does paying single premium mortgage insurance NOT make sense?

Obviously this wouldn’t make sense in a situation where you aren’t going to have the loan for enough time to make the buy-out worth it. It is usually about 30 months that you need to have the loan. If you are buying a home as a short term investment than single premium mortgage insurance is not for you. Also, if interest rates are falling and there is a chance that you might refinance in the next couple of years than single premium mortgage insurance might not make sense.

However, if you are going to have the loan for at least 3 or more years and you have the funds to pay for it (The seller can pay for it also if you negotiate that in the purchase contract) than the single premium mortgage insurance is sort of a no-brainer in my opinion.

 

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