Vail Daily column: Mortgage insurance can offer benefits

Mortgage insurance — when I first propose and discuss the option to those buying and even refinancing homes, the reply I receive is generally not one of enthusiasm to say the least. Mortgage insurance carries the connotation of wasted money or excessive monthly payments. But when examined in a little more depth, mortgage insurance can be a savvy financial tool to use when buying or refinancing a home if the circumstances require it.

By definition per Wikipedia, mortgage insurance “is an insurance policy which compensates lenders or investors for losses due to the default of a mortgage loan.” Mortgage insurance can be issued from both private and government sources. With a few exceptions when a second mortgage can be used in lieu of mortgage insurance, the mortgage insurance is required on all real estate transactions where there is not 20 percent equity in the property or a 20 percent down payment on the purchase — it’s as simple as that. Either 20 percent equity in the property or mortgage insurance (or some sort of second lien) is required. Second liens are starting to surface again in the current market place, but as of right now mortgage insurance is more readily available and with better terms and conditions.

For starters, the insurance can be structured in one of three ways. A separate or additional monthly payments can used, or the insurance can be factored in as a higher interest rate or the premium can be paid as a one lump sum payment due at closing. Determining the best means of structuring the premium, with one of these three options, is where the scenario gets interesting.

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Structuring Insurance

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How much the insurance premium will cost or the rate at which it will be calculated is determined upon various factors specific to each individual borrower and transaction. Those factors may be items such as credit rating, amount of down payment/equity, property type, property classification and even the type of primary loan being used for the transaction.

Structuring the insurance as a separate monthly payment carries the benefit of being able to eliminate that payment once 20 percent equity is accrued in the property. Whereas, increasing the interest rate to cover the insurance will generally carry a lower monthly payment, but the higher rate will stay with the borrower until they sell the home or refinance the loan. Paying the premium as a one-time payment means more money out-of-pocket but the lowest possible interest rate and monthly payment scenario.

Determining the most advisable means for a borrower to structure the financing takes a careful overview of the scenario as a whole. There are multiple factors that come in to play in order to try and determine the best course of action. For example the cost of each individual option (based upon the factors noted above), how long the borrower foresees owning the property, the current market sales trend in the particular area, whether or not the borrower plans on paying down the principal balance at on expedited schedule, whether seller credits may be negotiable and so on, all need to be taken in to the consideration.

For the time being, mortgage insurance is tax deductible which is a nice benefit. Furthermore, having to put less money in on a transaction obviously allows borrowers to keep their money invested or in the bank. Having a few more dollars to deduct at tax time and a few more dollars still in the bank are a benefit to most any homeowner. A blanket statement such as mortgage insurance is the right option for every homeowner is not accurate by any means. But, when carefully examined, financing a home using this option is certainly one to be explored for those borrowers in need as there are many benefits in doing so.

William A. DesPortes, of Central Rockies Mortgage Corp., can be reached at 970-845-7000, ext. 103, and william@dsmortgage.org.