Do I need to pay Mortgage insurance?  I get this question a lot.  I would say it is in my top five for most frequent questions asked.  It is a good question, but it depends on many different factors.

What is Mortgage Insurance (MI)?

The book definition according to Investopedia is, “An insurance policy that protects a mortgage lender or title holder in the event that the borrower defaults on payments, dies, or is otherwise unable to meet the contractual obligations of the mortgage.”

Mortgage insurance is typical for any mortgage that the appraised value, of the home, is less then 20 percent.  If you have a home in Marietta, GA and the appraised value is $200,000, then the mortgage would have to be $180,000 to not have MI.

Mortgage Insurance Depends on the Buyers Situation

There are many factors why people do or do not want to put down 20 percent.  It all depends on the buyers and what their financial picture looks like.

Reasons for no Mortgage Insurance

• Want a lower payment to make it more affordable
• Interest rates are low – get more house for the money with larger down payment
• A buyer does not want to be underwater if the real estate market tanks again
• Have the funds and can afford the extra money for down payment

Reason for Mortgage Insurance

• Do not have the 20 percent down payment
• Need it for emergencies – especially if you have kids
• Need it for renovations or repairs
• Wants to invest it in a college fund, retirement, or keep in savings

These are all great reasons for both, but I am a numbers guy.  Lets take a look at the numbers.

Mortgage Insurance:  5 percent down payment

Loan amount:  200,000
Down payment:  5% or  $10,000
Principle and interest payment:  $934.69
Mortgage insurance: $120.00 estimated

No Mortgage Insurance:  20 percent down payment

Loan amount:  $200,000
Down payment:  20% or $40,000
Principle and interest payment:  $787.10
Mortgage Insurance – $0

No Mortgage Insurance will save a buyer:  $267.59

This means you take the difference in the down payment and divide by the money you will save each month.  $30,000 / $267.59 = 112.11 months or 9.34 years.

Analyzing the Numbers

If you look at the numbers, a person putting down 20 percent will save an estimated $267.59 a month.  To get the 20 percent back it will take you 9.34 years.  Talk with your mortgage broker to go through all the numbers.  I have a client who is getting an estimate for a mortgage payment with MI and without.  Also, talk with your lender about paying the MI upfront or a lender paid MI loan program.

I am not saying that you should never put down 20 percent as a down payment, but look at your overall financial picture.  Make sure you have a good amount in savings, for emergencies, retirement, house expenses, etc.  After looking at your finances, if you feel you can afford a larger down payment and you are good with how many years it will take to recoup your money, then go ahead.  You can only make decisions based on the information you have at that particular time.  Doing your due diligence upfront,  you will make a sound financial situation that you will be comfortable with.

Mortgage Calculator with MI

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