The conventional loan is the most common choice for people looking for a purchase or refinance loan. This “go to” loan program has three different mortgage insurance payment options to suit different financial situations.
This is the most common option for borrowers who have a conventional loan, and the most encouraged option by lenders because it is the most affordable.
Borrower-paid mortgage insurance has no upfront costs, and is simply an additional monthly payment on your loan that ends once you have 22% equity in your home (78% loan to value). You can also challenge mortgage insurance once you reach 20% equity, and potentially get rid of this additional charge early.
Borrower-paid is ideal because it offers borrowers a manageable monthly payment that gets paid off in a reasonable amount of time. Another advantage of borrower-paid, especially in a rising interest rate environment, is that mortgage insurance will eventually go away, and you’ll be left with your low mortgage interest rate.
Borrowers with a conventional loan also have the option of paying a single premium as an extra closing cost to cover their mortgage insurance.
While this option may be more inexpensive than borrower-paid, it is not necessarily the most “affordable”, as most borrowers who require mortgage insurance often cannot afford this hefty up-front cost.
The single-paid option is a great one if large seller credit is available to cover the cost, as it is the cheapest way to pay off mortgage insurance. Also, math suggests this is the best option if a borrower has been in the home for more than 3 years.
Lender-paid mortgage insurance has no upfront cost, but instead a monthly payment that gets rolled into the interest rate of the loan, typically causing an increase of about half a point.
Though monthly payments are significantly lower here, they will last the entire duration of your loan. Lender paid mortgage insurance is a good option for borrowers who need a lower monthly payment in the early years of their loan.
Keep in mind the monthly payments will last for the entirety of the loan, making lender-paid the most expensive of these three options.
The chart shown gives a visual of how these payment options pan out over the span of a loan
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