What Is Single Premium Mortgage Insurance?

Mortgage insurance generally helps individuals purchase a home with a lower down payment, often less than 20% of the home’s purchase price. This insurance primarily protects the lender from financial loss if a borrower defaults on their loan. Among the various types of mortgage insurance available, single premium mortgage insurance stands out as a distinct option for borrowers seeking to manage their home financing costs.

Defining Single Premium Mortgage Insurance

Single premium mortgage insurance (SPMI) involves a one-time, lump-sum payment made at the time of closing on a conventional mortgage loan. This payment covers the entire mortgage insurance premium upfront, differing from options that require ongoing monthly payments.

This upfront payment allows borrowers who do not have the traditional 20% down payment to still qualify for a conventional loan. While the borrower pays this premium, the insurance itself is solely for the lender’s benefit, mitigating the increased risk associated with a lower down payment. By covering this cost in a single transaction, the borrower avoids the recurring expense of monthly mortgage insurance payments.

Payment and Coverage Mechanics

The premium for single premium mortgage insurance is typically paid at the loan closing. Borrowers have the flexibility to pay this amount out-of-pocket as part of their closing costs, or they can choose to finance it by adding the premium to their loan amount. Financing the premium increases the total loan principal, which in turn leads to higher interest payments over the life of the loan, increasing the overall cost.

For the borrower, the coverage typically lasts until the loan-to-value (LTV) ratio reaches a certain point, such as 78% or 80%, or until the loan is paid off, depending on the specific policy terms and federal regulations. Historically, mortgage insurance premiums, including single premiums, were tax-deductible for certain income levels, similar to mortgage interest. However, this deduction expired after the 2021 tax year and is not currently available for federal income tax purposes.

Scenarios for Single Premium Mortgage Insurance

One primary appeal is the elimination of ongoing monthly mortgage insurance payments, which can result in a lower overall monthly housing expense and simplify budgeting.

Borrowers who have sufficient cash reserves for closing costs but prefer to keep their monthly expenses as low as possible may find this option appealing. Additionally, not having a monthly mortgage insurance payment can positively influence a borrower’s debt-to-income (DTI) ratio. A lower DTI can sometimes make it easier for a borrower to qualify for a larger loan amount.

Other Mortgage Insurance Options

Borrower-Paid Monthly Mortgage Insurance (BPMI) is the most frequent type, where the premium is added to the borrower’s regular monthly mortgage payment. BPMI can typically be canceled once the loan-to-value ratio reaches 80% through borrower request, or automatically terminates at 78% LTV, as mandated by the Homeowners Protection Act of 1998.

Lender-Paid Mortgage Insurance (LPMI) is another option, where the lender covers the mortgage insurance premium. In exchange, the borrower typically receives a slightly higher interest rate on their loan. With LPMI, the insurance is embedded in the interest rate, and it cannot be canceled like BPMI; instead, removing it usually requires refinancing the loan. These alternatives present different cost structures and implications for a borrower’s monthly payments and long-term financial planning.

What Happens to Single Premium Mortgage Insurance

If a loan with SPMI is refinanced or paid off early, a partial refund of the unearned premium may be possible, but this is not guaranteed and depends heavily on the specific policy terms and the time elapsed since origination. Some policies are explicitly designed as “refundable” or “non-refundable,” which impacts the likelihood and amount of any potential refund.

However, even with a non-refundable label, if the cancellation is triggered by the Homeowners Protection Act of 1998, such as when the loan reaches a certain equity threshold, a refund of unearned premium may still be required. If the property is sold or the loan is paid down to the 80% LTV mark through regular amortization, the single premium is generally not recoverable, unlike monthly PMI which can be canceled at that point.