Mortgage insurance provides a lot of flexibility in the purchase process. You can get a loan with a much lower down payment because the mortgage insurer takes on part of the risk if the unthinkable happens and you can no longer make your payments.
Lower down payments are one benefit of mortgage insurance from a client perspective, but it still amounts to an extra monthly fee as part of your mortgage payment. No one likes paying more than they have to.
There are a couple of ways you can avoid paying for mortgage insurance on a monthly basis. We’ll look at each option. But first, let’s take a look at how mortgage insurance works.
Mortgage Insurance Basics
You’ll end up paying mortgage insurance on your primary property if you have a down payment of less than 20%. It’s an additional item that gets tacked on your mortgage payment every month.
There are two types of mortgage insurance that you might encounter when you have less than a 20% down payment: private mortgage insurance and mortgage insurance premiums. Let’s discuss each one along with ways you can get rid of it.
Private Mortgage Insurance (PMI)
If your down payment is less than 20% on a conventional loan, you’ll pay mortgage insurance on a monthly basis, otherwise known as private mortgage insurance (PMI). This type of insurance protects the lender in case you default on your loan.
Avoid PMI by Making Higher Down Payment
In order to avoid PMI, the best way is just to make a higher down payment. If you put down 20%, you can avoid mortgage insurance altogether.
The good thing about this is you can avoid the monthly fee for the insurance policy.
On the downside, you may be limited in terms of the budget you have for your house if you want to be able to put 20% down. On a $100,000 home, $20,000 is a significant chunk of change to spend on a down payment. Most likely, many of us just don’t have that lying around.
Mortgage Insurance Premiums (MIP)
If your down payment is less than 20% on an FHA loan, you’ll pay what is called a mortgage insurance premium (MIP). You pay a portion of the MIP upfront at the close of the loan and then continue to make payments on a monthly basis.
Mortgage insurance premiums aren’t currently deductible, but if you’re looking to save money on mortgage insurance, you may be able to avoid the monthly payments by refinancing into a conventional loan with lender-paid mortgage insurance (LPMI), like PMI Advantage.
Lender-Paid Mortgage Insurance (LPMI)
For a lot of us, a 20% down payment is just too much to shell out upfront. If that’s the case for you, you might choose to take a look at a lender-paid mortgage insurance program.
With LPMI, the lender pays for your mortgage insurance when the loan is completed and your monthly payment for mortgage insurance is eliminated. Instead, it’s built into the cost of the loan.
The lender-paid option can put thousands of dollars in savings back in your pocket over the life of the loan. It’s a great alternative if you don’t want to deplete the piggy bank to come up with 20%.
One thing to note is that LPMI programs like PMI Advantage are only available on conventional loans.
Can Mortgage Insurance Be Canceled?
The short answer? Yes, there are many situations in which you can get rid of your mortgage insurance. Most situations will require an appraisal in order to accurately determine the value of your house to calculate your equity.
With a conventional loan, you can request that mortgage insurance come off once you reach 20% equity in the home. It comes off when you reach 22% based on the original amortization schedule assuming your home hasn’t lost value. Automatic cancellation doesn’t happen if you reach this point early in your amortization schedule and you’ll have to pay for a home valuation to confirm value.
On FHA loans, mortgage insurance remains for the life of the loan if you don’t make a down payment of at least 10%. If you do make that down payment, it comes off after 11 years. The real advantage of an FHA loan is the opportunity to qualify with a 580 credit score as opposed to the 620 required for conventional loans.
The most important thing to remember about canceling your mortgage insurance is that you need to make sure that you’re current on your mortgage payments.
Now that you know ways to either avoid paying mortgage insurance or to cancel it later, are you ready to move forward? Go ahead and check out Rocket Mortgage by Quicken Loans.
Do you have any questions about mortgage insurance that we didn’t answer in the article? Let us know in the comments below.
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