Are you familiar with mortgage insurance and how it works?
When a borrower puts less than 20% down on a home purchase, the bank requires mortgage insurance to be included in their monthly payment. This insures the bank against the risk of you defaulting on your mortgage. In a sense, since you have a less “skin in the game” with your smaller down payment – the concern is that you would be more likely to walk away, which is also known as defaulting on your mortgage. So, mortgage insurance insures the bank against the risk of…..well, you.
The key to mortgage insurance and the crucial factor is choosing which type of mortgage to use, is whether the type of mortgage insurance you are getting is temporary or permanent. On conventional loans, the mortgage insurance will cancel once you have 20% equity based on the original purchase price. If you’ve been paying your mortgage for 2 years and your home value has increased significantly, you can pay for an appraisal or broker price opinion, to show you have 20% equity and remove the mortgage insurance early. Again, these terms apply to conventional mortgages.
You can also look into single premium mortgage insurance which can be either lender paid or borrower paid. Think of homeowners or auto insurance – you can pay monthly or pay the whole premium up front. If you do borrower paid mortgage insurance in a single premium, you pay your whole mortgage insurance premium at closing. If you do lender paid mortgage insurance, you are essentially have the mortgage insurance built into your interest rate.
FHA mortgages have different rules. The mortgage insurance is permanent for the life of the loan. Regardless of how much equity you build in the property. At some point, you will need to refinance in order to get rid of it. The key here is timing. FHA mortgage rates are usually a bit lower than conventional rates. Depending on what your FHA interest rate is, you need to get a quote on current conventional rates. Then see what your monthly savings will be when you take into account getting rid of the mortgage AND the new interest rate.
Not sure what kind of mortgage insurance you have and if you eligible to have it removed? I can help! By looking at your most recent mortgage statement, we can access what type of loan and mortgage insurance you currently have. Then we will look at your property value (don’t rely on Zillow for this) and determine the best strategy to remove your mortgage insurance.
Thinking about buying a home with less than 20% down and not sure which loan product to use? I can help with this too! There are situations where an FHA loan makes sense. We will review your finances as a whole, your future goals aside from home ownership and your career path. Then we can determine the best financing strategy for you.
Mortgages and mortgage insurance can be confusing, but I’m here to clear it all up!