Mortgage Insurance and How to Save More Money?
At the sight of the subject, you may ask what mortgage insurance is? Many people confuse mortgage insurance with mortgage life insurance, mortgage disability insurance, or even homeowners insurance. These are all very different types of insurance. They bring us such confusion. Let me give you a simple answer.
Mortgage insurance is designed to protect the lender in the event of loan default. In USA, mortgage insurance is generally required when the down payment on a home is less than 20%. In Canada, it is required when the down payment is less than 25%. The lower the down payment, the higher the risk for the lender. This can mean a higher monthly mortgage insurance premium. Depending on the specifics of your information, there are ways in which mortgage insurance can sometimes be avoided at the time of purchase, or dropped altogether at some point in the future. Many lenders now offer a single loan that does not require mortgage insurance. These generally have a slightly higher rate. If you have to choose, which one is best for you?
Let us look at one example. A home purchase with three scenarios in the states.
$200,000 home
$180,000 loan (with $20,000 down)
Scenario A
One loan WITH mortgage insurance
Payments of $1,320.00 plus mortgage insurance payments of around $80.00 per month for a total of $1,400 per month
Scenario B
One loan WITHOUT mortgage insurance (8.5% rate)
Payments of $1,384. $16.00 cheaper than using mortgage insurance,
Scenario C
Two loans. First mortgage up to 80% of loan value and Second mortgage of 10% of mortgage.
First mortgage of $160,000. Payments of $1,174 (8%)
Second mortgage of $20,000 Payments of $ 175 (10%)
Total payments for Scenario C is $1,359
In these three scenarios, Scenario C is the most cost effective. If you really want to dig into the numbers, there is one other comparison to make:
In Scenario A with mortgage insurance, at some point in the future, you will be able to remove the insurance once the loan to value is clearly under 80%. It may require a new appraisal which you will have to pay for, and approval of the new appraisal by the lender, which is not automatic. The counterpart to that equation is that in Scenario C, you can pay down the second mortgage at a fast rate. As soon as that second is paid off, you are left with a mortgage payment of $1,174!
The above is only an example. Not all mortgages have some situation. Please consider the down payment ratio, mortgage insurance premium rate, fist mortgage rate and second mortgage rate together. |
