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Should I Roll My Mortgage Insurance Premiums Into the Loan?

Mortgage Insurance Premiums

If you are buying a new home but don’t have a 20 percent down payment,  your mortgage company will require that you have mortgage insurance. The major disadvantage of mortgage insurance is that you as the borrower pay the premiums but the benefits go to the lender. If a borrower defaults on a loan, mortgage insurance pays funds to the mortgage lender. You will typically be required to pay mortgage insurance premiums until no more than 80 percent of a home is financed with a mortgage.

Mortgage Insurance Premiums Payment Options

Paying Mortgage Insurance Premiums

There are various options for paying mortgage insurance when you buy your new home.  When an FHA mortgage loan is used, a borrower can choose to:

1) Pay a monthly premium

2) Pay premiums upfront when a loan is obtained

3) Roll mortgage insurance premiums into the amount being borrowed.

The amount of insurance that is required for an upfront payment is 1.5 percent to 1.75 percent of the total loan amount. The mortgage insurance premium will not be based on your credit score.

If you choose to roll the mortgage insurance premiums into the total mortgage amount:

  1. This is the most convenient because it allows a borrower to pay one amount to the lender.
  2. It requires the least amount of money up front.
  3. It is available for FHA mortgage insurance if  you choose not to pay mortgage insurance upfront.

Disadvantages of Rolling Your Mortgage Insurance Premium into Your Mortgage:

When you have mortgage insurance premiums rolled into the loan, the cost will be more than if you pay the premium up front or per month because you are paying interest on your insurance premium.  Another disadvantage is because it is part of the loan you can’t save money by eliminating the mortgage insurance part once you reach the 80% mortgage / 20% equity threshold.

The option for paying mortgage insurance is based on your preference and requirements that have been set by the lender. Consult with various banks or mortgage lenders to see if any restrictions exist for rolling of the mortgage insurance premium into the loan amount. Some lenders may not offer this option if they use a private mortgage insurance option.

Escrow Accounts:

If the mortgage insurance premiums aren’t part of the mortgage and weren’t paid up-front, then lenders typically require that the monthly payment is made into an escrow account. An escrow account is like a seperate savings account that is used by lenders to cover things like homeowners insurance and property taxes because they are usually only due once or twice a year and the bank wants to be sure that you have enough money to cover it. Typically, the mortgage insurance premium is also included in the borrower’s escrow amount. When a monthly payment is made, the lender will take the amount that will go toward the principal and interest. The rest will go into an escrow account to pay for the homeowners premium, property taxes when due, and the monthly mortgage premium.

Definition of Mortgage Insurance Premiums according to Wikipedia: Mortgage insurance (also known as mortgage guarantee) is an insurance policy which compensates lenders or investors for losses due to the default of a mortgage loan. Mortgage insurance can be either public or private depending upon the insurer. The policy is also known as a mortgage indemnity guarantee (MIG), particularly in the UK.

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