Whether you’re in the process of purchasing your first home or you have been a homeowner for years, there are few phrases that struck right to the bone such as”mortgage insurance.” Why, you are not sure entirely, but tons of people indicated that it was terrible and you were going to regret it.
As usual, the truth lies somewhere closer to the center. Mortgage insurance is not your enemy, but it can be a costly surprise if you are not prepared. Let us dive into this hot button topic.
What Is Mortgage Insurance?
Mortgage insurance is a sort of coverage that your lender will take out on your loan to help protect them against loss should you default. They generally only need it if you have less than 20 percent down and often, this monthly payment will drop off as soon as you’ve paid your home loan down to the point that your house has about 22 percent in equity versus its mortgage.
To be clear, this insurance does not cover you — at least not directly. In the case of default, the bank gets the test, however you get something, too. In many states, even recourse states, the mortgage insurance can be enough to stop the bank from coming back for the difference between what you owe and what it was able to recuperate at a public sale.
Having mortgage insurance does not guarantee you will be free and clear in case you lose your home, but it sure helps, especially if that house is in great condition when you flip it on to the bank.
Its original purpose was to make it easier for visitors to get mortgages, even if they could not come up with a large down payment, however during the housing bubble a decade ago many homeowners discovered that it can assist on the back end, too.
MIP, PMI and Funding Fees
Mortgage insurance is a blanket term for several different insurance programs that essentially do the same thing. Rather than just calling it”mortgage insurance” across the industry, due to the way each program came to being in sort of a vacuum, different loan types have different names for it. For example:
* FHA calls it MIP, the Mortgage Insurance Premium. It was one of the first programs and the name is an original, for certain. It takes both an upfront and monthly payment.
* Private Mortgage Insurance is available on conventional loans and will be provided by one of a few different companies, MGIC being one of the greatest.
* Many men and women think that VA loans don’t have mortgage insurance, but they do — it’s a one time charge at closure understood as the”Funding Fee.”
For most people, having mortgage insurance is just a reality of life. They can either continue to give their whole payment to someone else to pay off real estate the renter will never have a stake in, or they can give a fraction of their payment over to the bank so as to be given a chance to establish some equity and construct a small wealth, even if it’s in the form of the family home.
Considering that the pricing of your mortgage insurance is based largely on your outstanding mortgage balance, the payment will probably get smaller and smaller each year.
You can expect to pay from a half percent to one percent of your total mortgage balance annually. So, for example, if you borrow $300,000 to purchase your home, your mortgage insurance payment will probably be anywhere from $1,500 to $3,000$125 to $250 a month, the first year.
Getting Rid of Mortgage Insurance
Although mortgage insurance has its own place, you don’t want to pay it forever. That’s where this part of the site comes in! If you borrowed using an FHA program after the summer of 2013 and had less than 10 percent down, you probably have lifetime mortgage insurance. There’s no joking, this is not a great situation.
Usually, once you reach 78 percent loan to value, based either on the original appraisal or an updated one, the bank will drop your mortgage insurance. You may have to write a formal petition, but it is not that big of a deal. With these FHA goods, the mortgage insurance is meant to stay for the entire life of the loan. So, your alternatives to lose it are a little trickier. You can:
1. Avoid it completely by using a piggyback loan. This is a combination mortgage made up of an 80 percent LTV conventional loan and a 15 percent LTV secondary loan. That secondary loan, but can have a fairly high base interest rate and may have terms such as an adjustable rate, a shorter amortization period or a prepayment penalty.
2. Bring more to closing. Hey, it is not fun to crack your piggy bank or 401(k) to get extra money, but there are instances when it makes sense. This is only one of them. You always need somewhere to live, you could as well be building equity, also.
3. Refinance the monster. If you’ve noticed prices in your area rising dramatically or you’ve just been paying on your mortgage a while, it might pay to refinance your loan. Your Realtor can help you determine if it will be worthwhile to invest the money for a new appraisal and new loan paperwork. That’s also the downside, however. It can cost as much to refinance at the wrong time as you’re paying for mortgage insurance.
4. Sell your home. You know, it was a good home, but you’re sick to death of paying the mortgage insurance. You plan to take the sale proceeds to buy another place that you can put at least 10 percent down on to avoid further incidents of lifetime mortgage insurance.
The majority of the time, if you compare your mortgage insurance into the alternatives, it’s not really that big of a deal to pay an extra percent for the ability to purchase a home with five percent down, rather than once you finally have 20 percent down.
Remember that although interest rates have been in the three to four percent zone for a little while now, pre-bubble, they were between six and eight percent for a prime mortgage and no one blinked an eye. Effectively having a four to five — or maybe six — percent interest payment doesn’t have that much of a relative impact on your monthly housing expenses.