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Single Premium Mortgage Insurance: Is It Right for Your Home Loan?

According to the National Association of Realtors (NAR), the average homeowner’s net worth is up to 40 times higher than that of a renter. Real estate investment has long been considered one of the best and most approachable ways to build generational wealth.

Many people yearn to create a safe and secure residence for themselves and their loved ones, but FOBAH (fear of buying a house) keeps many from making the first move. 

A big driver of that unease is the myriad of costs associated with buying a home. One frequently overlooked expense is mortgage insurance, which allows lenders to offer loans to borrowers who may not qualify otherwise because of the size of their down-payment.

Knowledge is power — let’s delve into how mortgage insurance can actually help you realize your dreams of homeownership sooner rather than later. In most cases, building equity now is far more financially rewarding than waiting to build a bigger down-payment (all the while paying rent and watching home prices climb.) 

Crunching the Numbers

The first step to buying a home is an honest evaluation of your financial situation. If you’ve got a steady income, some savings, a decent credit score, and relatively low debt, you could be perfectly positioned to partner with an experienced mortgage lender and get pre-approved for a home loan.

Chicagoland is a highly competitive housing market, and navigating the complexities of making a winning offer can be daunting, especially for first-time buyers on a budget. Having a mortgage pre-approval letter in hand can show sellers you mean business and lend more weight to your offer.

Many hopeful homeowners are daunted by the down payment boogeyman. Even those in a healthy financial position may have trouble coming up with a substantial chunk of cash. For a conventional loan, private mortgage insurance (PMI) is required for those putting less than 20% down.

If you have less than 20% for a down payment but more than the minimum requirement, getting your mortgage insurance obligation out of the way with a single premium means you’ll have a lower monthly payment, which can help you better qualify, and free up extra money down the road for upgrades and emergency repairs. 

For those interested in exploring government-backed mortgages through the Federal Housing Administration (FHA), this is a separate conversation. You’ll need to pay an up-front insurance premium based on the terms of your loan, or 1.75% of the loan amount at closing (which is most commonly financed into your mortgage). And, you’ll also have a monthly insurance premium, based on 0.50-0.55% (annually) of your loan, depending on your down payment. All FHA home loans require mortgage insurance, as this protects lenders working with borrowers with lower down-payments

For this article, that’s the last we’ll mention of FHA financing, and we’ll focus exclusively on private mortgage insurance and conventional mortgages. 

Finding Your Comfort Zone

A professional real estate team with in-depth industry knowledge can offer crucial guidance and resources for exploring all of your options. When it comes to single-premium mortgage insurance versus making monthly payments, doing your due diligence is essential to ensuring you’ll reach your long-term financial goals. 

PMI rates vary depending on your loan amount, your loan-to-value ratio (LTV), and your credit score, and generally range from 0.10% to 2.25%. 

If you’re looking to buy a house for $300,000 with a conventional loan with 5% down and your PMI rate is 0.67%, the insurance premium added to your monthly mortgage payment is around $167.50

An upfront payment would be $6,450, but paying monthly would total over $7,000 in just 3 and a half years. Going the single premium route would result in big savings, especially if you plan to reside in the home for the foreseeable future.

Monthly PMI can be removed once you hit 80% LTV, and the lender will remove it automatically at 78% LTV (relative to the purchase price.) If you plan to pay down your loan more aggressively than the 30-year schedule, or you bought in an area where home values are skyrocketing (such as South Chicago, Humboldt Park, Elk Grove Village, and Schaumburg), then paying mortgage insurance premiums monthly makes more sense. 

Your lender will be able to assist with the heavy lifting when it comes to this type of math. You may also want to consult with a certified financial planner who can help you determine the best course of action for getting what you want now and in the future.

Making Informed Decisions

The real estate landscape in Chicagoland is constantly evolving, and it’s common to have misgivings and misconceptions about whether now is the right time to buy, what types of financing options are available, and how much will be due at closing

The statistics speak volumes: homeowners often enjoy more wealth-building success than those who don’t. Whether you pay monthly or take care of it upfront with a single premium, mortgage insurance makes increasing your net worth more accessible and equitable.
Understanding the complex journey to homeownership is vital for anyone considering making the leap from renting to buying. I’ve got the answers you need — let’s start the conversation today!


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