Mortgage Insurance Options and Costs

Posted Thu, 2010-03-25 15:06 by Emily Caryl

This is a continuation of a discussion about private mortgage insurance.  If you missed yesterday's installment, check out The Ins and Outs of Mortgage Insurance.  Today, we'll explore the cost of mortgage insurance and four different private mortgage insurance products.

And in keeping with tradition, here's something to keep your eyes from crossing while you read.

Canal Club, Richmond, VA¹

If you were to shop for health insurance, you could choose from many different plans or products based on your budget and healthcare needs.  You might choose an HMO product, a traditional PPO plan, or catastrophic health coverage.  Likewise, there are many different mortgage insurance products from which to choose.

Borrower Paid Monthly Insurance

By far, the most common mortgage insurance product is Borrower Paid Monthly Insurance.  BPMI premiums are paid monthly and are included in a borrower's regular mortgage payment.  There is usually no up-front cost.

How much does BPMI add to the monthly payment?  Two scenarios are provided below for the purchase of a primary residence with a 10% down payment (90% LTV) or a 5% down payment (95% LTV).

Advantages of BPMI:  BPMI is widely available from almost any lender and premiums are fairly consistent from one lender to the next.  BPMI can be canceled once a loan reaches 78-80% LTV, therefore reducing the monthly payment.  And there is usually no up-front cost for obtaining BPMI.  The first month's premium is due with the first month's mortgage payment.

Disadvantages of BPMI:  BPMI is often the most expensive mortgage insurance product.  It can add a considerable amount to a borrower's monthly payment.

Lender Paid Mortgage Insurance

Lender Paid Mortgage Insurance premiums are paid by the lender.  But LPMI doesn't come for free!  In exchange for paying the borrower's MI premiums, the lender charges a higher interest rate.  How much higher?  That depends on the lender and the specifics of the mortgage loan.  Here are LPMI options from one lender:

Advantages of LPMI:  LPMI is widely available from almost any lender.  There is typically no up-front cost to obtain LPMI.  And because the mortgage insurance premiums are, in effect, financed over the life of the loan, LPMI often results in a lower monthly payment over BPMI.

Disadvantages of LPMI:  LPMI rates vary considerably from one lender to the next.  LPMI could be a great deal from Lender A and a horrible deal with Lender B.  A borrower who wishes to obtain LPMI will need to shop carefully.  In addition, LPMI cannot be canceled when a loan reaches 78-80% LTV.  The borrower pays the increased interest rate for the life of the loan.  That may not be a significant cost if a borrower plans to sell the home or refinance after a few years.  But a borrower who plans to keep a loan for 30 years could end up paying tens of thousands of dollars in increased interest costs.

Single Premium Mortgage Insurance

As the name suggests, Single Premium Mortgage Insurance premiums are paid in one lump sum by the borrower.  Premiums can usually be financed into the loan or they can be paid at closing along with the down payment and closing costs.

There are two varieties of SPMI:  refundable and non-refundable.  With refundable SPMI, if a borrower cancels MI coverage within the first five years of the loan (i.e., pays down the loan balance to 78-80% of the original value of the property), the borrower will receive a pro-rated refund of the premium.  Non-refundable SPMI does not offer such a refund.  Non-refundable SPMI premiums are more expensive than refundable premiums.  However, since most borrowers finance SPMI, the additional cost is usually not significant.  In both scenarios below, refundable SPMI (financed into the loan) would increase monthly payments by less than $10 per month.

Advantages of SPMI:  SPMI often results in the lowest monthly payment of any other mortgage insurance product.  In addition, the refundable premium might be an attractive choice for a borrower who plans to pay down the balance of his loan significantly during the first few years.

Disadvantages of SPMI:  SPMI premiums vary considerably from one lender to the next.  And not all lenders allow SPMI.  A borrower who wishes to investigate SPMI will want to shop carefully.  SPMI also involves either a significant up-front cost to the borrower or an increase in the loan amount.

Split Mortgage Insurance

Split MI is the newest MI product on the market.  It is a combination of Borrower Paid Monthly and Single Premium Mortgage Insurance.  Split MI allows a borrower to choose a percentage of the loan amount to pay up-front (at closing) and an amount to pay monthly.  The more a borrower pays at closing, the lower the monthly MI premium.  For instance, a borrower who chooses to pay .75% of his loan amount at closing will pay a larger monthly MI premium than a borrower who chooses to invest 2.0% of his loan amount at closing.

While most MI companies allow the up-front portion of Split MI to be financed, most lenders do not.  Split MI is non-refundable.  If it is canceled, a borrower typically does not receive a refund of the portion paid up-front.

Advantages of Split MI:  Split MI allows a borrower to choose how he pays his premiums based on his needs.  A borrower with extra cash on hand may choose a larger amount to be paid at closing, significantly reducing his monthly mortgage insurance cost.  A borrower who chooses to make a smaller up-front investment will still pay smaller monthly mortgage insurance premiums over BPMI.

Disadvantages of Split MI:  Split MI generally requires an up-front investment.  Most lenders do not allow the up-front premium to be financed into the loan.  In addition, many lenders (and some mortgage insurance companies) do not offer Split MI at all.  A borrower wishing to obtain Split MI will need to shop carefully.

Factors Affecting Mortgage Insurance Cost

Each of the above examples was given for the purchase of a primary residence with either a 10% or 5% down payment and a fixed rate mortgage with a 30 year term.  It was also assumed that the borrower has excellent credit.  Since mortgage insurance premiums are expressed as a percentage of the loan amount, a smaller loan amount will result in a lower premium.  There are also many other factors which will affect the cost of mortgage insurance premiums:

• The higher the loan to value (the lower the property equity), the higher the cost of mortgage insurance.
• A loan with a longer term (number of years expected to pay the loan in full) will have a higher mortgage insurance cost.
• A mortgage refinance will result in slightly higher MI premiums than a purchase transaction.  Mortgage insurance is currently unavailable for a cash-out refinance.
• Mortgage insurance premiums for a second home will be slightly higher than those for a primary residence.  Mortgage insurance is currently unavailable for non-owner occupied or investment properties.
• Adjustable rate mortgages with an initial fixed period of less than five years will pay more for mortgage insurance.
• A borrower with derogatory credit, a low credit score, or a high debt-to-income ratio may incur a greater cost for mortgage insurance.

In addition, each private mortgage insurance company establishes their own rates for MI premiums.  Although BPMI rates are generally competitive, rates for LPMI, SPMI and Split MI can vary considerably.  And since the lender chooses the mortgage insurance company (not the borrower), it is not unusual for Lender A to quote a substantially different cost for MI than Lender B.

Choosing a Mortgage Insurance Product

With all these options, how on earth does a borrower choose the best product?  It depends on each borrower's circumstances.  When considering mortgage insurance, I encourage borrowers to ask the following questions:

• How long do you plan to keep the home?  Will you live there until you retire or might you want to sell it and move elsewhere in 3-5 years?
• What's your money doing for you now?  Is it better to invest in a larger down payment? Or are you better off choosing a lower down payment and leaving the remainder of your cash where it is?
• Which is more important - the lowest monthly payment possible or the lowest up-front cost possible?
• How quickly do you plan to payoff the mortgage?  Will you make additional principal payments to payoff the loan faster?
• Are you comfortable with a 15 year term (and a larger monthly payment) instead of a 30 year term?

Still want to know more about mortgage insurance?  Stay tuned for the next post in this series: Qualifying for Mortgage Insurance.  Questions, comments or concerns about mortgage insurance products?  Contact Emily Caryl or post your comments below.

1.  "Bright Place," written by James Nash, performed by The Waybacks, Canal Club, Richmond, VA, June 29, 2005.

*Crunching The Numbers: All calculations presume a fixed rate mortgage with a 30 year term, purchase transaction, owner occupied, 720 credit score, single family detached residence, located in Jefferson County, Washington. BPMI 10% down example (90% LTV) includes interest rate of 4.75% and APR of 5.30%. BPMI 5% down example (95% LTV) includes interest rate of 4.75% and APR of 5.56%. LPMI 10% down example (90% LTV) includes interest rate of 4.99% and APR of 5.16%. LPMI 5% down example (95% LTV) includes interest rate of 5.25% and APR of 5.41%. SPMI 10% down example (90% LTV) includes interest rate of 4.75% and APR of 5.05%. SPMI 5% down example (95% LTV) includes interest rate of 4.75% and APR of 5.15%. Both SPMI examples assume mortgage insurance premiums are financed into the loan. Split MI 10% down example (90% LTV) includes interest rate of 4.75% and APR of 5.21%. Split MI 5% down example (95% LTV) includes interest rate of 4.75% and APR of 5.48%. Both Split MI examples assume up-front mortgage insurance premium is paid in full at closing. All examples include estimate of $600/year for hazard insurance and $3,000/year for property taxes. Calculations do not factor closing costs or pre-paids. All interest rates quoted were available on March 23, 2010.

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