Types of Mortgage Insurance

Single premiums are one option for paying mortgage insurance on your property. There are both advantages and disadvantages to using the single premium payment method; the right plan for you will depend on your financial needs and goals.

Single premium insurance works by including the cost of your insurance in your loan. The total cost is assessed at the time you close on your property. However, instead of paying for your up front, it becomes a part of your loan, with a portion of your insurance being included in your monthly payment. It is important to understand that single premium mortgage means you will pay interest on your insurance, even though payment is not due at closing. If you need insurance to secure a loan, however, single premium gives you a means to purchase the property. In the end, you may end up spending more for for another payment option.

Some types of single premium mortgage offer an opportunity for a rebate. Typically, if the loan is terminated within five years you will be eligible for a rebate, but the monthly payment included in your mortgage will be slightly higher than if the policy does not offer a rebate opportunity. When deciding between a policy with or without a rebate, think realistically about whether you will be able to use it. You may save money overall by choosing a policy that offers a rebate, but if there is a significant chance that you will not terminate your loan within five years and take advantage of the rebate, you might lose money by paying more for your insurance.

When deciding between all of your options, calculate how much interest you will need to pay over the course of your mortgage. Compare this to the amount you would spend with annual or monthly premiums.

    Split Premium

    Split premium mortgage insurance is a fusion of single premium and monthly premium. It works by including the cost of the insurance in your loan when you close on your property. No money is due at closing. Instead, the cost is rolled into what you pay for your mortgage each month. You end up paying interest since it is included in your loan.

    Monthly premium mortgage insurance means that you pay a set amount per month for your insurance. This is usually larger than the amount rolled into your monthly mortgage payment for a single premium mortgage insurance plan. However, you will not pay any interest with a monthly premium plan, so this option could cost less in the long run than single premium mortgage insurance.

    In a split premium insurance policy, part of the cost of the insurance is included in your loan. This amount is determined when you close on your property. The rest of the cost is paid on a monthly basis. With split premium insurance, you will pay less interest than with single premium. Your monthly payments will also be lower than if you have monthly premium.

    In many instances, monthly premium insurance costs less than single premium due to the interest that accumulates on single premium policies over the course of the mortgage. However, monthly premium policies require more money per month than single premium policies. Split premium insurance is an option for someone who cannot afford an insurance plan with monthly premiums but wants to save money on interest payments.

    As you decide between types of insurance, create a budget and see if you can afford a split premium policy rather than a single premium policy. While this will be slightly more costly per month than the single premium option, it will allow you to spend less overall than you would with a single premium mortgage policy. Talk with your loan officer about what split premium options are available, and divert as much of your insurance cost to your monthly payments as you can. That way, you will minimize the interest you pay.

    Level Annual Premium

    With a level annual premium mortgage insurance policy, you will pay for one year’s worth of insurance when you close on your property. This may seem like a large sum to pay at once, but keep in mind that a level annual premium policy is generally less costly overall than a single premium or split premium policy. The rate of your mortgage premium will be fixed each year with a level annual policy. However, the rate is reassessed on an annual basis.

    After the first payment, premiums may be collected in a lump sum each year or divided into monthly payments. This can differ depending on the terms of your insurance and mortgage as well as on the lending institution. Discuss payment options with your loan officer to determine which best fit your budget.

    If you can afford a level annual premium insurance policy, it may be less expensive overall than a single premium policy or a split premium policy. Unlike the single or split premium policy options, you will not need to pay any interest on your insurance with a level annual premium policy, because this policy is not included as part of your loan. However, you will need to have enough cash to cover the cost of your insurance on a yearly basis.

    Usually, level annual mortgage insurance tends to cost slightly less than monthly premium insurance. By paying for your first year of insurance at closing, you could end up spending less than if you opt for a monthly premium policy. However, this also requires having access to the cash to make your first payment. If you cannot afford to pay for an entire year’s worth of insurance at closing, you may opt for the monthly payment plan, where you may only have to pay for the first month’s insurance at closing. However, some lending institutions do require payment of at least several months of insurance to close on a property. Do your research beforehand and ask your loan officer what options are available.

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