Understanding Mortgage Insurance And do you Really Want to Invest 20% Down to Avoid it?

I have many clients who initially tell me they don’t want mortgage insurance on their purchase. Mortgage Insurance protects the lender in case you default on your loan. I think borrowers have been engrained to believe that MI is such a waste of money that they just want to get rid of it. It is important that the general public understand mortgage insurance and consider NOT using a lot of their capital to invest just to avoid it. Let’s explore the realities…
Mortgage insurance decreases as the down payment increases. It also is dependent on many other factors, some of which include a) debt to income ratios b) whether you are a First-Time homebuyer c) whether there are multiple borrowers and d) credit scores. Let’s take, for example, a married couple with 740+ credit scores, 40% debt to income ratios, and 2nd time homebuyers. Let’s consider a purchase price of $500,000. Here is the reality: A client putting 5% down payment ($25,000) will pay approx. $103 per month in mortgage insurance. With 10% down ($50,000), the MI drops to $79. With 15% down ($75,000), the MI drops to $46 per month.
So think about this: Do you really want to invest 20% to avoid paying any mortgage insurance? That would mean a $100K investment for NO MI. When you could put $25K down and have MI of only $103. Yes, your total mortgage payment will be higher because the loan amount is higher (but that is leverage and a conversation for another time), but as to the MI, you are avoiding putting an additional $75K down for a cost of only $103. That is VERY CHEAP MONEY (1.6% annualized). And you see how cheap the MI is when you put 10% and 15% down?
There are other considerations to be made regarding Mortgage Insurance:
If your household earns less than $100K, much of the mortgage insurance you pay is tax deductible!
There is a LENDER PAID MORTGAGE OPTION where you DON’T PAY MONTHLY MI, but it is reflected in a slightly higher rate. Call me or email me for details.
You just don’t NEED to put 20% down! Money is so cheap now that I often recommend to my clients that they put MUCH LESS DOWN on a purchase to leverage their cash outlay. For example, put 5% down ($25K) at a mortgage rate of approx. 3% and invest the other $75K (if they were considering 20% down) in a 1st Trust Deed at 7%! That way, you make money on your money at MUCH higher returns than 3%. Again, call me or email me for details.
These examples apply only to conventional loans, not FHA loans.
Curt Kravitz is a 35-year veteran loan officer serving Santa Clarita and neighboring communities! He also has 7 years of accounting experience prior to entering the loan business in 1986. Call him for any lending questions or Preapprovals. He welcomes all calls and IF YOU HAVE A MORTAGE SUBJECT YOU WOULD LIKE HIM TO DISCUSS IN FUTURE ARTICLES, PLEASE EMAIL HIM YOUR REQUEST! His email is ckravitz@bayeq.com. Phone number is 661-705-2500. Happy Holidays!