How to Handle Mortgage Insurance as a Home Buyer

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Have you heard of mortgage insurance? Do you know why it exists and when it comes into play?

If you're buying a house with an FHA loan, you use it all the time. FHA loans always require mortgage insurance because there is always some unfavorable factor that comes with these loans. That factor could be a small down payment or below-average credit from the buyer, for example. Because of this elevated risk to the lender, insurance is required.

Conventional loans have a little more flexibility. If you don't put 20% down, you'll have mortgage insurance. The kind of mortgage insurance most people think of is paid monthly, which comes in the form of a premium you pay until the balance of your loan is below 80% of the home’s purchase price. You can also pay mortgage insurance in a lump sum, where the whole cost is paid at once, and you never have to pay it again.

Another way to pay mortgage insurance is with lender-paid mortgage insurance. You'll still have a lump sum, but instead of paying it all at once, the lender will give you a slightly higher interest rate on your loan and use the credit to pay the mortgage insurance.

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Mortgage insurance comes into play when your down payment is less than 20%.

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Another option is split-premium mortgage insurance, which allows you to have a lump sum and some monthly payments at a reduced amount. The reason for choosing one method over the other depends on many things, like income.

Mortgage insurance is not tax-deductible over certain income levels, whereas mortgage interest is. Someone with higher income would probably go with lender-paid mortgage insurance because of the difference in tax treatment between mortgage insurance and mortgage interest. If you're keeping the property long-term, monthly mortgage insurance is typically better because you pay more in the beginning, but then it goes away.

As you can see, there are plenty of ways to deal with mortgage insurance. If you have more questions about this topic, please feel free to reach out to me or my team. We'd be happy to answer any questions you have.