When borrowers have less than 20% down payment they are required to have mortgage insurance on their loan. There was a time when financing was available with second loans at high loan to values and the borrowers would finance an 80-10-10 or 80-15-05 to avoid mortgage insurance. This was known as Piggy-Back financing. That option is currently not available.
However, there is a way to finance up to 95% loan to value and not have a monthly mortgage insurance payment. There is mortgage insurance only instead of paying it each month, the insurance is paid in one lump sum at closing known as a single premium. The single premium can be paid by the borrower, as a seller credit or by the lender.
The lender paid single premium is how most borrowers prefer and the easiest method to cover the expense. When a borrower wants a lower interest rate they have the option to pay points to buy the rate down. If the borrower takes a higher rate, the lender gets a credit from the secondary market (points in reverse) which must be given as credit to the borrower. This credit is used to pay the single premium mortgage insurance.
As an example, let’s say the borrower purchases a home in the amount of $625,000 and puts 10% down for a 90% loan in the amount of $562,500. Typically, the monthly mortgage insurance would be $300 per month. In this example the single premium would be $9,956. If you think that is a lot, multiply $300 times 60 monthly payments (5 Years) and the cost is $18,000.
Had the borrower chosen the monthly premium the interest rate is 4.0% with a principal & interest payment of $2,685. The single premium paid by the lender the interest rate is 4.5% with a principal & interest payment of $2,850. The .5% increase in interest rate to cover the credit for the premium amounts to a higher payment of $165 a month. This is less than the $300 premium and is tax deductible as well. At 4.5% the lender uses the credit from the secondary market and pays the $9,956 single premium. Nothing is added to the loan amount which stays at $562,500.
Borrowers have stated that they want to hold off buying until they can save enough for the down payment to avoid mortgage insurance. Now there is a way to avoid mortgage insurance payments and purchase with less than 20% down.