Mortgage insurance (also known as private mortgage insurance or "PMI") has long been one of the bugaboos of buying a home with a downpayment of less than 20%.
The insurance serves as additional collateral representing the difference between a 20% downpayment and your actual downpayment. You need it to buy the house, but you pay for it long after the purchase— when its benefit is no longer apparent. It can add $100 or more to the monthly payment, with the homeowner often asking, "What am I paying this insurance for?"
MassHousing, an innovator in affordable home financing, has been a leader at providing a creative answer to that age-old question.
The first thing MassHousing did was to give the consumer a real, tangible benefit in exchange for their monthly premium (the complaint has always been that "PMI only protects the bank and not the homeowner"). How? By creating MI Plus™, a mortgage insurance policy whereby if you lose your job, we will pay your principal and interest on your mortgage loan for up to six months while you look for a new job. You get this coverage automatically, at no additional charge, if you have a loan from MassHousing and you put less than 20% down. So far, we've paid nearly $3 million in benefits to over 600 borrowers, with an average of five benefit payments each. The average monthly benefit to unemployed borrowers has been $960.00. An amazing benefit, especially in this economy, right?
The second thing MassHousing did was to create a way for someone else (a "third-party") to pay the whole mortgage insurance premium up-front. Yes, you've got that right. Someone other than the buyer—the seller of the home, an employer, a non-profit agency or a city or town with a homebuyer assistance program—can pay the whole mortgage insurance bill on behalf of the consumer. No more monthly premiums tacked on to your mortgage payment. Oh, and you still get the benefit of the job loss protection. Not bad.
MassHousing keeps the cost low for the third party by using something called "non-refundable up-front premium pricing." Depending on the size of the downpayment, the cost ranges from 1.5% to 3.0% of the mortgage.
This so-called "third-party paid MI" eliminates the homebuyer's monthly premiums and saves them anywhere from $100 to $200 a month. Since the third party doesn't expect a refund if the borrower refinances or prepays the mortgage, there is no objection to the non-refundable feature.
Let's look at an example.
You're a homebuyer. You've put down 5% and plan to borrow $200,000. In that scenario a third party (let's say it's the seller, who wants to make a "concession" in order to sell the home, but doesn't want to reduce their asking price) would pay a one-time fee of $4,000 for the buyer's MI premium. A borrower without the benefit of third-party paid MI on the same loan would pay a monthly mortgage insurance premium of $83.33 a month. Said another way, you'd need to earn $3,000 per year more to afford that loan with the MI premium. With third-party paid MI, you can earn $3,000 year less and still afford the $200,000 loan.
There's one caveat to be aware of. If you purchased your home with third-party paid MI and you're accustomed to no monthly mortgage insurance premium, you may find that if you want to refinance to a new loan with a lower interest rate, you may end up having to pay a monthly mortgage insurance premium (if you do not yet have 20% equity in your home). The additional costs can eat up some or all of the benefit of lowering your interest rate.
If you are looking to buy a home, and you are concerned about mortgage insurance, be sure to talk to a MassHousing-approved lender. They can explain more about the benefits of MassHousing's mortgage insurance, and how, if you can strike the right deal, you can still get the benefits of job loss protection without any monthly MI premium at all. Now that's a good deal.