You are buying your first home, finally have scraped together the 5% down payment and now you have to pay an extra $250 per month for mortgage insurance – wait, what? Mortgage insurance does nothing for you, it protects the lender in the event of non payment.
I don’t know about you, but I do not like paying for something that is not benefitting me in the slightest, and I want my payments as low as possible.
Good news, there are other options! If you have a good credit score (700 or above) most lenders offer lender paid mortgage insurance. Instead of paying an additional amount for mortgage insurance every month, the mortgage insurance premium is added to the rate. Even though the rate is higher, with no additional mortgage insurance added to your monthly payment, you save money. Here is an example so you can see for yourselves:
Based on a 700 score, a $300,000 loan amount means the loan to value ratio is 95% (i.e., 5% down).
The interest rate on a 30 year fixed mortgage:
$300,000 at 4.5% interest rate =$1742/month ($1520 principal and interest payment + $222 for private mortgage insurance)
$300,000 at 5.125% interest rate = $1633/month (principal and interest, no private mortgage insurance)
You actually save $109 per month even though the rate is higher, which is $40,000 over the life of the loan! It really is a no brainer!