Why Get Bozeman Home Mortgage Insurance?†
When financing a Bozeman home, the advantages of (private) mortgage insurance (PMI) are not always evident to the borrower.
Many prospective borrowers believe they should/must put at least 20% down (an 80% Loan-To-Value LTV ratio) on the home they are purchasing because they believe it’s imperative to avoid paying mortgage insurance. However, there are many situations in which a borrower can benefit by buying mortgage insurance when they purchase their Bozeman home.
Five Types of Mortgage Insurance, which your lender can explain:
- Borrower-Paid Mortgage Insurance
- Single-Premium Mortgage Insurance
- Federal Home Loan Mortgage Protection
- Split-Premium Mortgage Insurance
- Lender-Paid Mortgage Insurance
- Getting Bozeman home mortgage insurance may change the amount of home for which you qualify. For example, a borrower with a $20,000 down payment can buy a $100,000 dwelling without mortgage insurance. This meets the 20% rule for opting out of purchasing mortgage insurance. But by using mortgage insurance, a borrower may be able to purchase a more expensive property than they could have, if they had put down 20% on a less expensive property. (Be aware that an increased LTV is a higher risk and can make your loan more expensive.)
- Mortgage insurance can help home buyers consolidate debt and save on income taxes. Even if borrowers can come up with a 20% down payment, it may be more beneficial for them to put less down and apply the balance of their available funds to other debts or opportunities (see example below).
- Even if borrowers don’t have a lot of debt to pay off, they may have alternative opportunities for investing their money. Let’s look at the situation of another couple, Andy and Jan Green. The Greens also have a combined income of $50,000 per year ($4,167 per month), and have planned to make a 20% down payment on a $125,000 home. However, the Greens are debt-free. Their loan officer explains that the return on the equity they use to make a down payment is much higher with a smaller down payment, as show below. This illustration assumes the home appreciate at 15% per year.
- The home appreciates the same amount regardless of the down payment amount. And, the Greens can invest the balance of the down payment to increase their wealth. Investing $12,500 in a mutual fund that returns 8% will earn $1,000 in the first year. In an emergency, the money is also much easier to access in a mutual fund than it would be if it was tied up in the home’s equity. In addition, the higher loan amount may increase their mortgage income tax deduction! Please read the IRS Home Mortgage Interest Deduction publication.
Mortgage Insurance Calculations (Examples):
EXAMPLE: Charles and Angela Brown have a combined income of $50,000 per year ($4,167 per month). They’ve picked out a beautiful home and negotiated a purchase price of $125,000. The Browns have saved $25,000 for use as a down payment, and they have $12,500 in debt, as detailed below:
|Debt||Original Balance||Original Term||Interest Rate||Monthly Payment||Balance Due|
|Car Loan||$18,000||5 yrs||10%||$382.45||$8,500|
EXAMPLE: The Browns had planned to use the entire $25,000 to make a 20% down payment. However, their loan officer points out that they should consider using half of that money to pay off their existing debts, and use the balance to make a 10% down payment. Although they’ll need to obtain mortgage insurance, their total monthly payments will be significantly lower.
|Expenditure||20% Down Payment||10% Down Payment|
|Home Purchase Price||$125,000||$125,000|
|Monthly MI Premium**||$0.00||$48.75|
|Other Debt Payments||$582.45||$0.00|
|Total Monthly Payments||$1,361.21||$874.24|
|Monthly Savings is MI||N/A||$411.97|
|Housing Debt Ration***||22.4%||25.8%|
|Total Debt Ration||36.4%||25.8%|
* Assumes 30-year fixed-rate fixed-payment mortgage at 8.0% interest (yes, today’s rates are much lower!).
** Assumes monthly premium no-refund payment plan option with 25% coverage.
*** Includes $200 per month for taxes and hazard insurance.
EXAMPLE: The Browns are able to save hundreds of dollars a month while consolidating their debts into one payment at a lower interest rate. And, this doesn’t even take into account that financing a higher loan amount may increase their mortgage interest income tax deduction, one of the last tax breaks available. With MI, they may be able to convert non-deductible debt into deductible debt.
|Down Payment||Initial Equity||First-Year Appreciation||Return Equity|
†Taunya Fagan Real Estate does not advise on any home mortgage or home mortgage insurance requirements or issues. Use of any information from this site or any other web site referred to is for general information only and does not represent personal insurance advice either express or implied. You are encouraged to seek professional insurance advice for questions and assistance.
BOZEMAN REAL ESTATE REPORTS