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Limited Money for a Down Payment? Think Mortgage Insurance!

When you want to buy a home and don't have funds to pay 20 percent of the home's value as a down payment, you'll basically have two options: get an FHA loan, which provides government insurance on your loan, or get private mortgage insurance (MI).

Some people—including lenders—advise home buyers to avoid MI, and for some borrowers that could make sense. If your credit isn't great, or certain factors make your loan somewhat risky, an FHA loan might be the way to go. But for lots of borrowers, MI can be a much better choice.

What Is MI?

MI lets people buy homes with down payments of as little as three, five, or even zero percent of the home's value.1 To do this, mortgage insurers provide insurance to the lender that will pay back some of the money the lender may lose if the borrower isn't able to pay the mortgage.

Saving for a 20 percent down payment can take a long time, but the low cost of your MI premium may enable you to become a homeowner today, before interest rates rise or the home of your dreams appreciates beyond your reach. See for yourself how MI can make a difference in the cash needed for a down payment to purchase a home:

Home Purchase Price 20% Down Payment (without MI) 10% Down Payment (with MI) 5% Down Payment (with MI) 3% Down Payment (with MI)
$200,000 $40,000 $20,000 $10,000 $6,000
$300,000 $60,000 $30,000 $15,000 $9,000
$400,000 $80,000 $40,000 $20,000 $12,000

What Makes MI Different from FHA?

In a nutshell, FHA offers "one-size-fits-all" pricing—meaning it doesn't really fit at all. You pay a certain amount when the loan closes, then a premium each month for as long as you have the loan. MI, on the other hand, offers a variety of options, including paying the entire premium at closing (a single premium), paying nothing up front and then a monthly premium (a monthly premium), or even having the lender pay the premium for you and charge you a higher interest rate to compensate (a lender-paid single premium). Also, United Guaranty's MI pricing isn't "one size fits all"—we analyze several loan factors to provide a price that's tailored specifically to your loan.

Some other benefits of MI compared to FHA:

Can MI Save Borrowers Money?

Although each loan will be priced differently, here's an example of some of the MI options we offer and how they compare with FHA pricing. Note how the savings really add up after five years:

United Guaranty Performance Premium® FHA
Borrower-Paid Monthly Lender-Paid Single FHA
Financed

Total Monthly Payment
$1,037.14

Total Monthly Payment
$983.88

Total Monthly Payment
$1,055.47

$96.67
Monthly MI
58 bps

$4,240
Up-front MI Premium Paid by Lender
212 bps

$3,500
Up-front
(175 bps)

+
$141.67
Monthly
(85 bps)

3.875%
Interest Rate
4.25%
Interest Rate
3.5%
Interest Rate

Five Year MI Savings
$6,444
Compared to FHA

Five Year MI Savings
$8,551
Compared to FHA

 

Assumptions: Base loan amount $200,000, two borrowers, 720 credit score, 41% DTI, 30-year fixed-rate purchase loan, single-family house, stable market, 95% LTV United Guaranty, and 96.5% LTV FHA. Performance Premium pricing as of May 12, 2014. FHA rate source: FHA Mortgagee Letter 2015-1.

MI Coverage Can Be Cancelled!

Another thing to consider is that as you make mortgage payments and your mortgage loan balance gets smaller, you build equity in your home. When the principal balance of your loan reaches 80 percent of the original value of the property, MI can be cancelled but FHA insurance cannot.2 No matter how much equity you build in your house, FHA will continue to charge an insurance premium as long as you keep your loan. Here's an example of how the ability to cancel MI can save you money over the life of a loan:

United Guaranty Performance Premium® FHA
Total MI Cost for the Life of the Loan

$9,860

$15,626

$36,379

Assumptions: Base loan amount $200,000, two borrowers, 720 credit score, 41% DTI, 30-year fixed-rate purchase loan, single-family house, stable market, 95% LTV United Guaranty, and 96.5% LTV FHA. Performance Premium pricing as of May 12, 2014. FHA rate source: FHA Mortgagee Letter 2015-1.

What Won't Mortgage Insurance Do?

Mortgage insurance won't pay off your mortgage loan in the event of your death. MI protects the lender in case of foreclosure. It is not a form of life insurance.

More MI Information

So now you know the basics about mortgage insurance. From here, your loan officer is probably the most qualified person to help you understand what makes the most sense for your specific needs. If you're just starting the home-buying process, or you'd like to learn more about mortgage insurance, here are some great resources:

1. United Guaranty will consider gifts and grants that provide funds for up to 100% of the down payment if certain requirements are met.

2. FHA insurance can be cancelled after 11 years on loans originated with a down payment of 10% or more.