How To Avoid Mortgage Insurance – Thinking of how to avoid mortgage insurance?, it’s easy, just make a 20 percent down payment when buying your home. But if you can’t afford the 20% down payment there are other options. Let’s show you:
What is Mortgage Insurance?
Mortgage insurance is a coverage policy that offers a lot of flexibility when purchasing a home. For those who can’t quite afford to make a 20 percent down payment, mortgage insurance offers you the option to put less money down. In exchange, it adds an extra fee to your monthly mortgage payment.
How Mortgage Insurance Works
The company pays your lender for losses which occurs if the loan goes into default. Mortgage can either be public or private, it all depends on the insurer.
The lender will only be taking on additional risk by giving you a home loan with a lower down payment, but mortgage insurance helps reduce this risk.
Types of Mortgage Insurance
The process for removing mortgage insurance varies as well as the type of mortgage insurance you are required to pay also varies as a result of your loan type. Here are the different mortgage insurance policies:
Mortgage Insurance Premiums (MIP)
This insurance, is handled by the Federal Housing Administration (MIP) that FHA borrowers pay. MIP is needed on all FHA loans for which an application was completed after June 3, 2013.
MIP is paid as an upfront premium and also as an annual premium which is divided into 12 monthly payments. The rate you pay is based on the current rate set by the federal government and if necessary, the upfront premium can be rolled into a loan amount.
A guarantee fee, is similar to mortgage insurance and is paid directly to the USDA. This fee helps USDA cover a portion of the lender’s loss in the event of a default by the borrower on the loan.
Guarantee fees are due upfront and annually with the annual premium broken into 12 equal installments and paid month to month. The borrower is then at liberty to either pay the upfront fee out of pocket or roll it into their loan amount.
Note that, unless you refinance and switch to a different loan type, the annual fee cannot be removed.
Private Mortgage Insurance (PMI)
A private mortgage insurance (PMI) is arranged by the lender, and it’s provided by a private insurance company. Where a home buyer defaults on their loan, the insurance company covers a portion of the lender’s loss.
As stated Freddie Mac and Fannie Mae, a borrower is required to pay PMI when less than 20% of a home’s purchase price is offered as a down payment.
The options available to you to pay PMI deepens on your lender, but can most commonly be paid as a monthly premium that’s added to your mortgage payment.
Other options, also include an upfront premium paid at closing and a combination of upfront and monthly premiums. PMI information is always included in the Loan Estimate you receive from your lender.
How To Avoid Mortgage Insurance
Avoid Mortgage from the Beginning
In this category, two options are available to you. There are
20% down payment on a conventional loan: Doing this, automatically makes your LTV 80%, allowing you pay your loan without mortgage insurance.
Get approved for a VA loan: VA loan types do not need mortgage insurance regardless of your down payment. All the borrower does, is pays a funding fee on their VA loan.
PMI Advantage: With PMI, you can accept a slightly higher mortgage rate and eliminates monthly mortgage insurance payments. Even though this option, requires PMI on your home, it eliminates the monthly premium that you would otherwise have to pay.
Take Out Mortgage Insurance
Normally, PMI stands eligible for cancellation once the home’s loan-to-value ratio (LTV) is 80% or less. The law stipulates, that it must be removed once the home’s LTV gets to 78% based on the original payment schedule at closing, depending on the occupancy and unit type.
A loan-to-value ratio compares how much is owed on your loan with the appraisal value of your home. Here, what lenders do, is access your LTV to determine the level of risk involved in giving you a loan. The LTV, can be calculated by dividing your mortgage amount by your home’s value.
These options, can help you stay out of mortgage insurance.