If you are buying a home with less than 20 percent down, or are refinancing less than 20 percent equity in your home, the amount your lender is quoting you for mortgage insurance can seem arbitrary. But by understanding how the insurance companies determine their rates, you can go into the process with a better understanding of how the rate is determined and whether you are getting a fair deal.
What Determines Mortgage Insurance Premiums?
Just like any insurance company, mortgage insurers base their premiums off of default rates, and charge less for those classified as lower risk. So if you buy a home with 5 percent down, you can expect to pay more for mortgage insurance than if you put 15 percent down. Similarly, a buyer with a credit score of 670 will pay a higher premium than one with a score of 740. Three of the major mortgage insurers are Radian, MGIC and United Guarantee. All have rate sheets on their websites. You can input the specifics of your situation and get an accurate rate quote. These are the same calculations your lender will use.
Tiered Mortgage Insurance rates
There are two ways to finance mortgage insurance: Paying it with your monthly mortgage payment or paying it upfront as a lump sum. Let's assume you are doing a 30-year mortgage and have a credit score of over 740. If you choose to include it in your monthly payment, the rate with Radian for 5 percent down will be 0.67 percent. With 10 percent down the rate will be 0.49, while with 15 percent down the rate will be 0.32. If you choose to pay the premium as a lump upfront sum, the rate with 5 percent down will be 2.15 percent. With 10 percent down it will be 1.37, while with 15 percent down it will be 0.99.
How to Convert Premium Factors to Dollar Cost
To calculate the one-time premium amount, multiply your loan amount by the factor above. That amount will be a closing cost for your loan. For example, if you are putting 10 percent down on a $200,000 home (financing $180,000) your upfront insurance cost will be $2,466. The monthly factor takes a little more math but it is also fairly simple. Again multiply your loan amount by the factor in the first list above, then divide it by 12. That amount will be added to your monthly payment. For example, if you are putting 10 percent down on a $200,000 home (financing $180,000) your monthly mortgage insurance payment will be $73.50.
Other Risk Factors and Options
Other variables besides loan to value and credit score can affect the rates offered by private mortgage insurance companies. Rates will be higher on “jumbo loans” (greater than $417,000 in most areas). They can also vary depending on the property type, your debt-to-income ratio, and sometimes even by state and county. Some lenders also offer “lender paid” mortgage insurance, in which they pay the insurer themselves and pass the cost on to you as a higher rate. While this can be a good option for some buyers, don't be fooled into thinking you are avoiding mortgage insurance. One of the advantages to paying monthly mortgage insurance monthly is that when you pay your mortgage down to a certain level (80 percent, 78 percent or 75 percent depending on loan program) you can have your mortgage insurance removed. If you opted for lender-paid mortgage insurance, or a lump sum upfront, then you will not have this opportunity.
A Word on FHA Loans
Although the information above applies to conventional financing only, for many buyers, FHA is a good option. The rates are higher, but oftentimes qualification is easier, the down payment requirement is less, and sometimes the base interest rate will be lower than on conventional loans. FHA has both an upfront and monthly premium for mortgage insurance. Early in 2013, the FHA increased its premiums on all loans. For 30-year fixed loans, the upfront premium is 1.75 percent and the monthly is based off a factor of 1.35 percent.
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