Mortgage Insurance: A Means To An End
Few home buyers like to pay mortgage insurance (MI), and many will go to great lengths to avoid it.
However, if you’re expecting to use a low- or no-downpayment mortgage for your upcoming purchase, and you find yourself in a situation requiring mortgage insurance payment, consider changing your perspective.
Mortgage insurance is a temporary means to a long-term gain. You may even find it cheaper to pay on a loan with mortgage insurance than it is to keep paying your rent.
Furthermore, mortgage insurance is almost never forever. So, don’t run from a loan just because it required a monthly payment of MI.Verify your new rate (Nov 16th, 2019)
What Is Mortgage Insurance?
If you’re buying a home and don’t plan to make a downpayment of at least 20%, you may have already heard of mortgage insurance.
You still may be asking, though, “What is mortgage insurance and why do I have to pay it?”
Mortgage insurance, like other forms of insurance, is protection against a loss. And, as its name implies, mortgage insurance specifically insures against loss related to your mortgage.
Mortgage insurance comes in two basic varieties with two similar-sounding names.
- Private Mortgage Insurance, which is commonly called PMI
- Mortgage Insurance Premium, which is commonly called MIP
Private mortgage insurance — PMI — is linked to conventional mortgage lending. That is, loans which are backed by Fannie Mae or Freddie Mac.
Fannie Mae and Freddie Mac have a requirement that loans with less than 20% down at closing must carry an accompanying mortgage insurance policy. In general, the smaller your downpayment, the higher your PMI payment.
The Conventional 97 program, for example, which allows a downpayment of just 3 percent on a home, requires a larger PMI policy than a low-downpayment loan with just 10 percent down.
PMI fees are annual fees, but get broken down into 12 monthly installments which are added the payments you make to your lender.
The other mortgage insurance type — MIP — is linked to loans via the Federal Housing Administration (FHA).
The FHA requires mortgage insurance on all of its loans, regardless of downpayment. FHA MIP varies based on downpayment amount and loan term length.Verify your new rate (Nov 16th, 2019)
How To Avoid Paying Mortgage Insurance
For buyers who are firmly against paying mortgage insurance at all, there are only a few ways to go.
Make a twenty percent downpayment
Mortgage insurance isn’t required for conventional loans with 20% down or more, so the surest way to not pay PMI is to make a larger downpayment.
The funds for downpayment can come from your own accounts; or, can be gifted from a member of your family. So long as you have 20 percent down, PMI won’t apply.
Or, if you don’t have 20% to put down, you can look to the 80/10/10 mortgage.
More commonly called a piggyback loan, the 80/10/10 required you to pay 10 percent down at closing, while simultaneously using a second mortgage for the “other” 10 percent.
With the piggyback loan, you’re putting down less than twenty percent, but PMI won’t be not required.
Reach 20% home equity
For conventional loans, mortgage insurance is temporary. It’s only required until your home equity percent reaches 20% of your home’s market value.
In time, because your monthly mortgage payment includes principal repayment, you’re likely to gain that home equity and petition your lender to cancel PMI.
When home values are rising, this can happen quicker. Plus, as a homeowner, you’re permitted to make extra principal payments monthly to accelerate the home equity-building process.
Even better — because of the Homeowner’s Protection Act of 1998 — lenders are required to alert you when you’re eligible to stop paying your annual mortgage insurance costs.
Refinance Your Mortgage Insurance Away
Today’s FHA MIP policy is that mortgage insurance must be paid for as long as the loan exists. If the loan is retired, so is its FHA MIP.
In today’s housing market, accomplishing this may be easier than you think.
U.S. home values have climbed more than 30% since late-2012 which means that many of the homeowners who have used FHA financing this decade have at least some home equity.
With even just 5% equity (i.e. a 95% LTV loan), you may be eligible to refinance your FHA MIP away by switching to conventional.
You may still pay MI for a while, but with a conventional loan, when your loan reaches eighty percent loan-to-value, that MI payment disappears.
With mortgage rates low since 2014, this method has been a popular way to cancel FHA MIP.
Use the VA Home Loan Guaranty program
The VA home loan program allows for 100% financing and never requires mortgage insurance.
Therefore, if you’re an eligible VA borrower, make sure to explore your VA entitlements which are granted via the G.I. Bill.
VA loans can be used to buy, build, or improve upon any primary residence and no downpayment is required.
Plus, VA mortgage rates typically beat conventional rates and FHA rates, making the VA home loan the cheapest of the low- and no-downpayment mortgage options available today.
Any VA-approved lender can quote you on a mortgage rate.
What Are Today’s Mortgage Rates?
Mortgage insurance is neither good nor bad. It’s a means to an end. Mortgage insurance allows you to purchase a home with less than 20% down as opposed to trying to save another 12 months for a down payment.
Get today’s live mortgage rates now. Your social security number is not required to get started, and all quotes come with access to your live mortgage credit scores.Verify your new rate (Nov 16th, 2019)