Maybe it’s time to make peace with mortgage insurance…

Mortgage insurance gets a bad rap, but it’s a vital part of getting you into a home sooner — before you’ve had a chance to save that 20% down payment. 

Maybe you’ve already saved the full 20%? If that’s the case, feel free to see what we can for you, in just 15 minutes right here. 

Okay, now that those overachievers are gone, let’s get down to business... 

So, what does your down payment have to do with mortgage insurance?

In short, plenty. 

Basically, if you decide to put down less than 20%, you’ll need to pay mortgage insurance — it gives your lender peace of mind because they’re protected if you stop making payments on your loan. It’s generally paid as part of your monthly home loan payment. 

So, why 20%? Is that just a proprietary number? Nah, there’s a kind of science to it. If you happen to default on your loan, lenders figure they’ll lose about 20% on the home’s sale price.  

If you’ve covered that 20% with your meaty down payment, then the lenders are happy. But if your down payment is less than that 20%, then lenders start to break out in a nervous rash because they stand to lose money if you foreclose. 

In order to figure out just how much (or if at all they need to charge) mortgage insurance, lenders work off your Loan to Value ratio (or your LTV). 

As the name suggests, lenders weigh the amount of your loan against the value of the place you’re buying to get your LTV as a percentage.  

Then they use that number to decide whether or not they feel comfortable lending to you without a safety net (ie: mortgage insurance). The higher the LTV, the more they have to lend you, and the more it makes them squirm — enter mortgage insurance, which covers the lender’s ass if you default. 

So, if your LVR is 80% or more, you’ll pay mortgage insurance. 

How do I know if I’m on a one-way ticket to Mortgage Insurance Town?

Let’s run an example: say the place you’re looking to buy is 400k, and you need to borrow 350k (we divide your borrowing amount by the home’s value) to get 87.5% LVR. Hello, mortgage insurance. 

Mortgage insurance costs between 0.5 -2% of the entire initial loan amount, annually. For conventional loans, the rate you pay depends on a couple of factors including your credit score and down payment amount. Other loans such as FHA, VA and USDA will have a pre-set rate. 

Let’s take a look at a 250k loan — assuming you’re paying 1%, you’d be looking at around $2500 a year, or $48 a week.  

Now, the payments on a 250k loan with a 3.2% interest rate, fixed for 30 years are approx. $250 a week — add in your $48 for PMI and you’re still paying less than rent. Also, your mortgage insurance is calculated annually so it’ll decrease as your loan amount does. 

And if property values are heading in the right direction, you’re even better off yet — a recent CoreLogic survey reported that average annual home equity rose by $56,700 per borrower in Q3 2021 — more than three times the gain from a year earlier.  

That 56K is waaaaaay more than you’d be paying in mortgage insurance in a single year.  

The other benefit of the equity increase is, if you already owned, suddenly your LVR would be looking a whole lot better. Heck, your LVR might have improved enough to do away with mortgage insurance all together. 

Do you have to pay mortgage insurance forever?

As if. Once you’ve paid enough off the loan’s principal, the mortgage insurance is removed. 

What’s ‘enough’ exactly? 

It’s pretty much what a ‘standard’ down payment would be — so 22% of the home’s original value. Once you’re at that point — you’re free to tell your mortgage insurance to get lost. 

There is one exception to the whole ‘ditch your mortgage insurance once you’ve paid down enough’ rule — and that’s FHA loans. Those bad boys have a ton of benefits, especially if you’re struggling to get your down payment together, but you’ll be paying mortgage insurance for the life of the loan. 

So, should you befriend mortgage insurance?

Ultimately, that’s up to you. If you’ve got the full 20% deposit, or you’re close to it — then you probably won’t even need to consider it. 

But if that 20% is just a speck in the distance, mortgage insurance could be your ticket to owning a home sooner. Then, you could be sitting on your front porch toasty in the knowledge that your equity is growing and you’re paying off your own mortgage, not your landlord’s. 

Jump in here to get started and see how much you can borrow in 15 minutes.