How to reduce your Private Mortgage Insurance

Mortgage insurance can be a pain, though in many cases it’s a necessary evil. Without mortgage insurance you may not be able to qualify for certain loan programs, including loans serviced through the FHA. Depending on the circumstances of your loan and the insurance you buy, this can be a considerable expense. Fortunately, there are ways to reduce this expense; in some cases, you may even be able to get rid of mortgage insurance altogether!

Be sure to keep in mind that like many things loan-related, there are a lot of factors that go into determining your mortgage insurance costs. While these tips may help you to lower that payment, their effectiveness will vary from person to person.

Build Your Credit

As with loan interest rates, mortgage insurance costs can be affected by your credit score. Mortgage insurance is designed to provide additional safety for the lender that extends the loan. As such, the better your credit score is, the less risk there is that you’ll default on the loan. If you can improve your credit, you’ll have a much stronger case for negotiating a lower mortgage insurance payment.

Pay Down Your Loan

Mortgage insurance is typically required when your down payment is under 20 percent of the value of your home. As such, you can usually renegotiate it or have it removed entirely as you build equity. If you can afford it, make additional payments against your loan to pay it down and build equity faster; this will get you in a position to renegotiate your mortgage insurance sooner than you would otherwise be able to.

Refinance Your Mortgage

Provided that you can get a good deal on your new loan, refinancing is a great way to reduce the cost of mortgage insurance. Because you’re taking out a new loan to pay off the previous one, any mortgage insurance that’s required will be based on the new loan amount in comparison to your home’s value. If you refinance with a loan that’s for 80 percent or less than the total value of your home, then you likely won’t have to take out mortgage insurance for the new loan at all. Likewise, if you can refinance with some government-backed loans such as those offered through the Department of Veteran Affairs or the Department of Agriculture, then you should be able to skip the mortgage insurance as well.

Increase Your Home’s Value

Another option for reducing or eliminating your mortgage insurance payment is increasing the value of your home. In some cases, this is simply a matter of having the property appraised again; there are a number of external factors that can affect property value, and if your property sees a value increase then you can use this to renegotiate your mortgage insurance rate. If that isn’t an option, consider home improvements or similar actions that will increase the value of your property so that you can get out from under that insurance umbrella.

Talk to Your Lender

If you aren’t sure what to do, talk to your lender and see which options are best in your situation. They may look at your mortgage payment history and other factors to help you find a way to reduce that insurance cost. They can also help you calculate your equity and see exactly how much more you’ll need to significantly reduce (or completely eliminate) your mortgage insurance obligations. If you’ve already built over 20 percent equity then you may be able to simply ask for the insurance to be cancelled in your first contact with the lender.

Ask the Experts

Since mortgage insurance costs can vary from person to person, it’s always a good idea to find a professional to advise you about your specific loan situation. Fortunately, HomeKeepr can connect you with mortgage experts who can help you evaluate your personal situation and find the best way to reduce or eliminate your mortgage insurance costs. Sign up for a free account today to get started!

What is mortgage insurance?

If you currently have a mortgage or are looking at taking one out, you’ve probably come across a concept so notorious, so vile, that it can cause blood-curdling screams and fainting in the boldest of people.

You know the one.

“Mortgage insurance.”

Before you throw your phone across the room, take a minute to read to the bottom of this blog. Mortgage insurance doesn’t deserve the horrible reputation it has earned over the years — in fact, it can help you a whole lot.

What is Mortgage Insurance?

There’s a lot of confusion over mortgage insurance, what it is and what it isn’t.

Some people think that mortgage insurance is the same as homeowners insurance. Sadly, the two aren’t twinsies. Homeowners is yet another monthly expense you need to count on when buying a house.

Others think that mortgage insurance is some nebulous thing that bankers are billing you for just to get your money for no reason. This is also missing a few facts.

Let’s take a step back.

In the days before mortgage insurance, practically no one could get a mortgage with less than a 20 percent downpayment. That meant, at best, years of saving up or in many cases, simply never getting a chance at homeownership at all.

Over time, banks agreed that if there were some sort of insurance policy protecting their interest in the mortgages they wrote, they might be willing to take a smaller down payment, thus opening up homeownership to a lot more people.

And that’s exactly what it does today. It protects banks and enables more people to buy homes. If it weren’t for some form of mortgage insurance, there’d be no chance a bank would agree to a mortgage for someone with as little as 3.5 percent down.

This is the primary benefit for homeowners. Obviously the main benefit for banks is that they don’t get hit nearly as hard in case of a foreclosure, since the insurance will pay a percentage of the mortgage value directly to the lender.

Types of Mortgage Insurance

There are several entities that offer mortgage insurance (though you generally don’t get to choose), including MGIC, National MI, the Federal Housing Administration and the Department of Veterans Affairs. These private companies and government departments have procedures in place to help determine how risky you are as a borrower and then assign a price to your mortgage insurance costs. There are three main types of MI to be aware of:

Private Mortgage Insurance. When you get a conventional loan with less than a 20 percent downpayment, you’ll also be paying for a private mortgage insurance policy. Generally the price of these policies is based on a combination of your credit score and the terms of your mortgage. MGIC has a handy matrix here that can help you figure out what you’ll be paying. Some lenders may offer you an option to pay part of the policy upfront and the balance monthly, or they may offer to pay it for you in exchange for a higher interest rate.

Mortgage Insurance Premium. Mortgage Insurance Premium (yes, it’s really called that) is the insurance program that all homes purchased or refinanced using an FHA loan with less than 80 percent loan to value require to secure the note. While having MIP means you’ll be able to take advantage of FHA mortgage benefits like lower qualifying scores and those 3.5 percent downpayments, you do so with one big disadvantage.

Unless you bring a downpayment of at least 10 percent to the closing table, your mortgage insurance will stick around as long as the loan does. That means if you pay your mortgage off in 25 or 30 years, you’ll still be making MIP payments, too, even though you long ago built a pad of more than 20 percent equity in your home (more on this later). Oh, and MIP is a split premium, meaning you’ll pay an upfront fee plus a monthly fee.

VA Funding Fees. Although you don’t pay it monthly and it’s not called “mortgage insurance,” the VA funding fee functions in the same way as other mortgage insurance programs. It protects the lender, allowing them to make more loans to more military vets. The funding fee itself is highly variable based on a whole matrix of qualifiers, but at least it’s a one-time fee that you can wrap into your mortgage.

Saying Goodbye to Mortgage Insurance

When you get a conventional loan, you don’t have a lot to worry about when it comes to mortgage insurance. Just make all your payments on time and occasionally check your bills to see just how much equity you’ve managed to earn. Once your home has at least 22 percent of its value paid down (based on the appraisal made when the loan in question was acquired, or a fresh appraisal that you’ve paid for on speculation), making your loan to value 78 percent, mortgage insurance should drop right off. This is the most common situation homeowners with conventional loans find themselves in.

However, conventional mortgage insurance may also be cancelled once you’ve reached an 80 percent loan to value if you ask for it specifically and have a good payment history with no late pays in the last year. If you’re still paying mortgage insurance by the time you’ve reached the midway point of your loan, you can request the MI be dropped — this might happen if you’ve had a mortgage with a very high interest rate, for example.

When it comes to FHA loans, unless yours was made prior to June 3, 2013 or you had a 10 percent downpayment (as mentioned above), you can’t get rid of your MIP and keep your mortgage. This is a distressing thought for a lot of borrowers, but many end up selling before it really becomes an issue. Those that don’t still have the option of refinancing, with some notes eligible for the low-pain FHA streamline programs.

Ready to Find the Mortgage That’s Perfect for Your Purchase or Refinance?

Whether you’re trying to get rid of your mortgage insurance payment or you want to buy your first home, it’s time to check in with your HomeKeepr family. Through high quality professional referrals from people like your own real estate agent, you’ll meet the best mortgage lenders and brokers in your area. Why wait? Check in to the community to get started.

Understanding Mortgage Insurance

Whether you’re in the process of buying your first home or you’ve been a homeowner for years, there are few phrases that hit right to the bone like “mortgage insurance.” Why, you’re not sure entirely, but lots of people indicated that it was terrible and you were going to regret it.

As usual, the truth lies somewhere closer to the middle. Mortgage insurance is not your enemy, but it can be a costly surprise if you’re not prepared. Let’s dive into this hot button topic.

What Exactly is Mortgage Insurance?

Mortgage insurance is a type of coverage that your lender will take out on your loan to help shield them against loss should you default. They generally only require it if you have less than 20 percent down and often, this monthly payment will drop off once 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 check, but you get something, too. In many states, even recourse states, the mortgage insurance can be enough to prevent the bank from coming back on you for the difference between what you owe and what it was able to recover at a public sale.

Having mortgage insurance does not guarantee you will be free and clear should you lose your home, but it sure helps, especially if that house is in good condition when you turn it over to the bank. Its original purpose was to make it easier for people to get mortgages, even if they couldn’t come up with a big down payment, but during the housing bubble a decade ago many homeowners discovered that it can help 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 into 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 sure. It requires 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 biggest.
* Many people think that VA loans don’t have mortgage insurance, but they do — it’s a one time charge at closing known as the “Funding Fee.”

For most people, having mortgage insurance is just a reality of life. They can either continue to give their entire 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 in order to be given a chance to establish some equity and build a little wealth, even if it’s in the form of the family home.

Since the pricing of your mortgage insurance is based largely on your outstanding mortgage balance, the payment will 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 buy your home, your mortgage insurance payment will be anywhere from $1,500 to $3,000, or $125 to $250 a month, the first year.

Getting Rid of Mortgage Insurance

Although mortgage insurance has its place, you don’t want to pay it forever. That’s where this section of the blog 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 request, but it’s not that big of a deal. With these FHA products, the mortgage insurance is meant to stay for the entire life of the loan. So, your options to shed it are a little trickier. You can:

1. Avoid it entirely 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, however, can have a pretty high base interest rate and may have terms like an adjustable rate, a shorter amortization period or a prepayment penalty.
2. Bring more to closing. Hey, it’s not fun to crack your piggy bank or 401(k) to get extra money, but there are times when it makes sense. This is one of them. You always need somewhere to live, you might as well be building equity, too.
3. Refinance the monster. If you’ve noticed prices in your neighborhood rising dramatically or you’ve just been paying on your mortgage a while, it could pay to refinance your loan. Your Realtor can help you determine if it will be worthwhile to spend the money for a new appraisal and new loan paperwork. That’s also the downside, though. It can cost as much to refinance at the wrong time as you’re paying in 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.

Most of the time, if you compare your mortgage insurance to the alternatives, it’s not really that big of a deal to pay an extra percent for the ability to buy a home with five percent down, rather than when you finally have 20 percent down.

Keep in mind that although interest rates have been in the three to four percent zone for a 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 even six — percent interest payment doesn’t have that much of a relative impact on your monthly housing costs.

Ready to Shed That Mortgage Insurance?

Log in to your HomeKeepr community, where you can meet bankers who can help you refinance, builders who can help you add instant equity to your home and, of course, your Realtor who can help you build your case if you’ve accumulated enough equity naturally to be rid of mortgage insurance entirely. Because the entire community is powered by recommendations, you know the people you’ll meet can be trusted to follow-through in a totally professional way..