Typically regardless of whether a borrower is looking at FHA financing or Conforming financing, they will be required to pay mortgage insurance (MI) if the down payment is less than 20% (with FHA financing, this will be the case with even more than 20% down). The amount of monthly mortgage insurance payments varies between FHA and Conforming and can also be determined by loan to value. For example, on FHA the monthly MI is .55% of the loan amount divided by 12 (.5% if the loan to value is 95% or less). With Conforming financing, the monthly MI for 95% loan to value can be up to 1% of the loan amount/12 months (.68% and .38% for 90% and 85% loan to values respectively).
However there is a mortgage insurance option that can be very compelling for those with higher credit scores that can substantially reduce or in some cases virtually eliminate monthly mortgage insurance payments even when there is less than a 20% down payment. It’s called Spit Edge premium mortgage insurance and is only offered by a few lenders nationally. It allows the borrower (or seller via seller paid closing costs) to pay an additional fee up front to reduce or eliminate the mortgage insurance. This can make good financial sense, particularly if you are in a slowly appreciating market and/or your seller agrees to cover this cost with seller concessions.
For example, Conforming financing requires a minimum down payment of only 5% as long as you have a 740 credit score or better. However with only a 5% down payment, your monthly mortgage insurance on a $300K loan amount can be as high as $250/month. Using Split Edge, you could pay 1.25% of the loan amount upfront ($3750) to reduce your monthly mortgage insurance to only $82/month; saving you over $167/month in MI payments. If you take your upfront cost of $3750 divided by your monthly savings of $167, you have a pay back period of just over 22 months. This means that if you envision yourself staying in the home for at least 23 months, this could be a very wise financial decision, particularly if you can negotiate for your seller to pay this $3750 upfront on your behalf!
With a 15% down payment and 1.25% additional upfront, you can virtually eliminate any mortgage insurance payments, although because a homeowner is able to petition to remove mortgage insurance once the loan to value equals 80% or less, the payback period would need to be considered carefully along with the anticipated time period for reaching the 80% loan to value mark to determine if it makes financing sense.
I am always available for your questions and I’m happy to help you analyze your options to determine your best financial alternatives. You can contact me directly at 971-221-8525 or This e-mail address is being protected from spambots. You need JavaScript enabled to view it
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Tel: (971) 221-8525