If you are a first time home buyer in Fort Wayne, you are probably feeling like there is a lot of information you need to catch up on. At Indiana Home Experts, we are Fort Wayne’s trusted team of real estate agents that have helped singles, couples, and families find their dream home, easily and efficiently. We know that there is a lot of information to take in as you move through the home buying process. Which is exactly why you should keep up to speed on our articles. Today’s blog post will go over mortgage insurance; what it is and why you need it. Once you’ve mastered the idea of mortgage insurance, and you’re ready to dive into the world of real estate, contact the Fort Wayne Realtors at Indiana Home Experts!
What Is Mortgage Insurance?
For many home buyers, the biggest hurdle they face is a down payment, especially for first time homebuyers. Private mortgage insurance (PMI) allows homebuyers to purchase their home with less down than what may otherwise be required. Lenders and investors generally require at least 20 percent down when they are applying for a mortgage. As a first time home buyer, you can see how that would be challenging. If a homebuyer is not able of producing a 20 percent down payment, the lender will require PMI to provide a financial guaranty should the loan go into foreclosure. Generally, the lender will obtain the mortgage insurance based on the amount of the borrower’s purchase amount.
What Are The Benefits of PMI?
While it may seem that private mortgage insurance only benefits the lender, PMI does offer benefits to the homebuyers as well. Here are a few unique benefits of mortgage insurance:
- Buy a home sooner. A higher loan-to-value ratio means less time is needed to save money for a down payment.
- Increased buying power. Say you already have money set aside for a down payment. Private mortgage insurance may allow you to afford more home than if you only put 20 percent down.
- More cash-flow options are available to homebuyers. By putting less money down, you can keep the remainder of the cash you saved and put that towards other expenses like home improvements, paying off debt, savings, or emergencies.
- Some mortgage insurance allow prorated refunds of premiums upon cancellation.
- Mortgage loans with mortgage insurance on the applications can be approved faster than non-MI loans.
- Many mortgage insurance companies will allow you to cancel when it is no longer needed.
What Are The Different Types of Mortgage Insurance Plans?
There are two main types of mortgage insurance plans that are commonly used during the homebuying process: borrower-paid mortgage insurance (BPMI) and lender-paid mortgage insurance (LPMI).
- Borrower-Paid Mortgage Insurance requires borrowers to pay the premiums directly to the lender, and the lender pays it directly to the MI provider. Borrowers will be required to pay on a monthly basis, which is factored into their mortgage payments, or pay as a single lump-sum at closing that provides coverage to the lender for the length of the loan. If keeping closing costs at a minimum are important to you, consider paying the PMI premium as monthly payments. Typical PMI costs at closing require two or three months premium payments. Which is still far less than 20 percent down payment.
The benefit to monthly premium MI payments is it is conveniently factored into your mortgage payment that you pay monthly, and you can cancel as soon as it is no longer needed. Mortgage insurance is eligible for cancellation when the principal balance reaches 80 percent of the original value of the property. Homeowners that make larger mortgage payments may reach this threshold a lot quicker than making minimum payments.
The downside to paying mortgage insurance monthly, is it could be more costly long term, as opposed to other payment options.
- Surprisingly, lender-paid mortgage insurance is becoming more popular in today’s mortgage environment. Instead of your lender collecting the premium payments from the homeowner on a monthly basis or at closing, your lender pays the mortgage insurance for you. Yes, that does sound too good to be true, but the reason they do this is so they can build up your mortgage insurance costs and calculate it into your overall interest rate.
The benefit for lender-paid mortgage insurance is resulting in an overall lower monthly mortgage payment, as well as offer tax benefits. The downside to this type is that the mortgage insurance cannot be canceled.
Obtaining private mortgage insurance is very common, so don’t feel defeated if you are required to have it when applying for a home loan. Mortgage insurance not only protects the lender, but it also protects you, as the homebuyer. At Indiana Home Experts, our Fort Wayne Realtors are the experts in all aspects of homebuying. When you’re ready to take on the adventure and begin your home buying journey, contact us!