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For consumers purchasing or refinancing a home with less than 20% equity or 20% down, there’s a little-known fee that will apply to the total mortgage payment, effectively inflating the monthly outlay.
Mortgage insurance is paid by the the homeowner to insure the lender against future mortgage payment default. Mortgage insurance, also dubbed as PMI (an acronym for private mortgage insurance), can easily be several hundred dollars per month depending on the loan program. This added premium makes the cost of homeownership more expensive. However, there is a way to cut your mortgage payment using single-pay mortgage insurance.
First, keep in mind that “loan to value” (LTV) is the amount of money being lent against the value of the house. It’s computed by taking the loan amount, divided by home value. It’s a critical factor in home lending.
It is, in short, an added fee, but with a favorable upside.
Most people hate the idea of paying an extra monthly fee without any direct benefit to them. Consumers don’t directly receive a benefit from paying mortgage insurance (despite tax deductibility in some cases), other than the ability to secure lower equity financing.
Single-pay mortgage insurance allows a consumer to pay upfront a portion of the future mortgage insurance premiums at a discount at the close of escrow rather than financing these monies into their house payment. This improves the ability to qualify by means of a lower debt-to-income ratio, a lower monthly mortgage payment, and a lower cost loan.
Let’s say a consumer is looking at a loan for $300,000, using 70 basis points of the loan amount to estimate monthly mortgage insurance, $175 per month or $2,100 annually. $2,100 a year for five years adds up fast… $10,500 to be exact!
The single-pay choice (using an average 1.75% of the loan amount) would translate in this case to $5,250 that’s paid one time at closing. In other words, in exchange for more upfront overhead, the house payment is reduced by $175 per month. A consumer would recuperate these monies within just a little more than two years.
Consumer Tip: Further requirements include a middle credit score of least 700 or higher, primary home or secondary home financing only, a max 45% debt to income ratio and an approval from the lender.
Single-pay mortgage insurance offers consumers any easier more flexible way to secure financing and keep the long-term mortgage payment more manageable against a household budget. If folks have the equity or cash available, single-pay mortgage insurance makes securing higher loan-to-value financing more manageable as a PMI payment would never be required.
Image: iStockphoto
December 13, 2023
Mortgages