Mortgage Insurance Myths
Category : Refinance
May 12, 2016 by Naseer Siddique
All conventional mortgages require mortgage insurance if the borrower makes less than 20% down payment or in case of a refinance, if the equity in the house is less than 20%. Some loan programs do not charge separate mortgage insurance and have this indirectly built into the offered mortgage interest rate. This discussion specifically focuses on programs offering separate mortgage insurance but may be equally applicable to programs with built-in mortgage insurance. Even though most borrowers know they will pay mortgage insurance until they have 20% or more equity in the house what is little known is the fact that the mortgage insurance premiums depend upon the borrower’s credit scores and how much equity they have in the house.
Two borrowers with the same percent of equity but different credit scores will pay different mortgage insurance premiums. Similarly two borrowers with the same credit scores but different amounts of equity in the house will have different mortgage insurance premiums. While most borrowers would consider refinancing their mortgage to eliminate mortgage insurance once they have 20% or more equity in the house not many are aware of, or would consider refinancing their mortgage to reduce mortgage insurance premiums because of improved credit scores or increased equity in the house.
For example if a borrower purchases a house with 3% down payment, has a 700 credit score and obtains a $417,000 loan amount, the mortgage insurance is estimated at be about $399.63 per month. After 6 months if his credit scores improve to 740 and his property appreciates so he now has 6% equity in the house, the monthly mortgage insurance premium will be about $205.03. A difference of $194.60 per month. This is equivalent to refinancing at almost half a percent lower mortgage interest rate.
In conclusion, borrowers should consider refinancing their mortgage even at the same mortgage interest rate if other factors like improved credit scores and increased equity in the house would enable them to qualify for lower mortgage insurance premiums.
About the author
Naseer Siddique is a mortgage loan broker with Lakeshore Financial Inc in San Jose, California. He holds a Master’s degree in Computer Engineering and has been originating home refinance and purchase loans for over 29 years. He can be reached at firstname.lastname@example.org or by calling (408) 896-4249.