Let’s talk mortgage insurance premiums. If you don’t know what they are, they are an extra cost to you the borrower. You are buying an insurance policy on your mortgage that pays out to the lender should anything happen. If you are putting less than 20% down on a house, that mortgage must be insured. But do you know how much it costs or how it’s calculated? Understanding the premium charges will help lead you to making smarter down payments.
5%- 9.99% down payment of a purchase price is a 4% insurance premium
10%- 14.99% down payment of a purchase price is a 3.10% insurance premium
15%- 19.99% down payment of a purchase price is a 2.8% insurance premium
So, that means with a $300,000 purchase price and a $30,000 down payment (10%), you would have a 3.10% premium added to your mortgage, making your total mortgage amount $270,000 + $8,370 for $278,370 total. The $8,370 being 3.10% of your original $270,000 mortgage.
Now let’s say you have a down payment potential of $60,000 and have the income to afford a $350,000 purchase price but you found one for $325,000. Using your entire $60,000 down payment (18.46%), your new mortgage amount would be $272,420, where $7,420 of it represents the mortgage insurance premium.
But what if you change that $60,000 (18.46% down payment) to say $48,750 and have a down payment of exactly 15%? Well, your premium is still the exact same as it would be with an 18.46% down payment because your premium is still 2.8% of the mortgage amount. That means you will now save $11,250 (difference in down payments), while only paying $7,735 in premiums (an increase of $315).
I don’t know about you, but if someone told me I could put $11,250 less down and it would only change my insurance premium by $315, I am holding onto that money. You now have more cash for unexpected expenses, moving allowance, furniture, anything you want. You can even apply it to your first pre-payment against your mortgage and pay the interest down while taking time off your loan. Obviously if cash is not an issue, putting the full $60,000 would be better seeing as you are borrowing less and paying less interest. However, if cash is tight, why not hold onto it and pay that difference over the course of 25 years?
Consult with a Dominion Lending Centres mortgage professional when it comes to structuring your mortgage request with a bank. It is small little things like this that make all the difference.
Original post by Ryan Oake, Dominion Lending Centres – Accredited Mortgage Professional