When purchasing a home, mortgage insurance can be a key factor in your monthly payment anytime your down payment is less than 20% of the proposed sales price. But, how is mortgage insurance calculated? What role does your debt-to-income ratio (DTI) determine this cost? Let’s break it down:
How Debt-to-Income (DTI) Affects Mortgage Insurance
Your DTI ratio is a crucial factor when applying for a mortgage loan and determining the rate. Lenders calculate DTI by dividing your total monthly debts by your gross monthly income. The higher your DTI, the higher your mortgage insurance premium, which can impact your mortgage insurance premium (MIP) or private mortgage insurance (mortgage insurance) costs.
A borrower with a low DTI may receive better mortgage insurance rates, while a borrower with a higher DTI could pay more because they pose a greater lending risk. That’s why two borrowers with the same down payment percentage can have different mortgage insurance costs.
The Differences Between 5%, 10%, and 15% Down Payments
Your down payment amount directly influences your mortgage insurance costs. Here’s a breakdown of how different percentages affect your payment:
- 5% Down Payment – This typically results in the highest mortgage insurance costs because the lender is taking on more risk with a smaller initial investment from the buyer.
- 10% Down Payment – Your mortgage insurance rate is reduced compared to 5% down, as the lender has a greater financial cushion. However, it’s still a significant monthly expense.
- 15% Down Payment – With 15% down, your mortgage insurance costs are substantially lower, and in some cases, mortgage lenders may offer different insurance structures, such as lender-paid mortgage insurance (mortgage insurance).
Why Mortgage Insurance Estimates Aren’t Always Exact
Mortgage insurance pricing is not standardized with all lenders, unlike publicly available interest rates. Instead, it varies based on factors like:
- FICO scores
- DTI Ratios
- Loan Program (conventional vs. FHA)
- Loan Amount
As a result, it is difficult to provide an exact mortgage insurance estimate upfront. While lenders can give a general range, your final mortgage insurance payment is determined during the underwriting process once all financial factors are considered.
If you’re planning to buy a home with less than 20% down, understanding how mortgage insurance is calculated can help you prepare for your total monthly payment. Work with your mortgage lender to explore different down payment options and get a better sense of your specific mortgage insurance costs. At Bluefire Mortgage, we offer some of the lowest mortgage insurance rates as we operate as both a mortgage broker as well as a mortgage banker and have access to some of the lowest mortgage rates in the industry.
If you have questions, please contact our office to discuss your mortgage needs with one of our experienced Mortgage Loan Originators at (760) 930-0569.
