What Is Mortgage Insurance And How To Avoid Paying For It
Unless you’re the son or daughter of a wealthy family, chances are you need to get a home loan for you to buy the house of your dreams.
While the idea of getting a house of your own seems promising, getting your home sweet home may sometimes require you to get mortgage insurance.
Some people will give you a thumbs up upon hearing the idea about mortgage insurance.
However, I think you should avoid paying for it at all costs.
But before we get into the details of what you can do to prevent this kind of expenditure, let’s find out what mortgage insurance is first.
What Is Mortgage Insurance?
The easiest way to purchase a house is through a home loan, but doing so also bears with a lot of risks (i.e. defaulting on the loan). This is the reason why your lender will require you to get mortgage insurance. By doing this, no matter the kind of loss you experience during the loan, mortgage insurance can compensate you back.
If the borrower of the house loan dies or if a natural caused has kept the borrower from paying the credit in the full amount, mortgage insurance will be responsible for paying up for the remaining balance.
But that’s not the only reason people opt for mortgage insurance. If your capacity for the home down payment is less than 20%, house sellers might require you to get private mortgage insurance. Once your payment has reached 20% of the house price, you may already drop mortgage insurance.
Most of the time, mortgage insurance firms require their clients to pay monthly. This means your overall payment will be divided into 12 monthly installments.
How Much Does It Cost To Get Mortgage Insurance?
The amount you need to pay for mortgage insurance will highly depend on the down payment you are willing to settle.
If you have low-capacity for a down payment, you will most likely have to pay a higher rate for mortgage insurance.
It’s important to note that your mortgage loan rate can range from 30 to 115 basis points annually. Aside from your down payment, your credit score and loan term are also determinants of your mortgage loan rate.
It’s also essential to look for different quotes when it comes to mortgage loans if you were to get one. Here’s a mortgage broker I recommend.
6 Reasons To Avoid Mortgage Insurance
From this side of the equation, mortgage insurance looks like a pretty helpful tool for people who are looking to call a place their own home. But let’s look into the reasons you might want to reconsider the idea of paying for mortgage insurance.
1) High Cost
Getting a home loan may sound like you are cutting down on cost, but people who have already bought their home know that it is the other way around.
Getting mortgage insurance will most likely multiply whatever costs you already have with your home loan. You can expect the mortgage insurance to be at 0.5% to 1% interest.
This means if you have a home loan costing at $100,000 loan, you will most likely have to pay $1,000 per year.
At the very least, a family will pay about $200 on mortgage insurance alone. That amount is almost equivalent to what you’ll spend if you were getting a car loan.
2) It’s Not Tax Deductible
If you’re not married to a gross income of higher than $110,000 per year, you could be in trouble of having your tax payments increase.
Add that to the cost of a home loan; and the overall amount might wound up to be too much for you.
3) Your Family Won’t Benefit From It
When people hear the word “insurance,” they immediately assume that their heir or spouse will be given a particular amount of money upon the time of their death. We regret to inform you, however, that this isn’t the entire truth.
If you die before paying the house in its full amount, the lender will be the one who will benefit from your mortgage insurance. If you want to protect your family financially, you would have to get separate insurance.
4) You’ll Need To Pay For Mortgage Insurance For A Long Time
Once your payment has reached 20% of the overall price of the house, that’s the only time you can drop your mortgage loan.
While 20% doesn’t sound like a considerable number from this angle, waiting for your house equity to reach 20% will also take years. This means before having full ownership of the house; you will already be expending a lot of money on mortgage insurance alone.
5) It’s Not Easy To Cancel Mortgage Insurance
Sure, you only have to wait a couple of years for the house to reach 20% equity and then you can drop the insurance. However, convincing the mortgage insurance agency to cancel your subscription isn’t that easy either.
It could take months to years to have your mortgage insurance canceled. For one thing, you need to write a formal letter to the institution stating your desire to have your subscription canceled. That’s not all. Sometimes, the agency would also ask the house construction company to send them a formal appraisal that the house has reached 20% equity.
6) Some Lenders Won’t Let You Cancel Mortgage Insurance
The rule is that when the equity of the house reaches 20%, you are free to drop your mortgage insurance. However, some lenders require their clients to keep paying their mortgage insurance up to its full amount.
With that, it is essential that you read the fine print before you commit to getting mortgage insurance.
Why Not Just Pay The 20%
Some people opt for a mortgage loan because they believe it will be much more cost-effective for them. However, some people were tied into thinking they needed to get a mortgage loan to buy a house.
With that, you need to look into your income capacities. If you believe that paying for the initial 20% for the house is a viable option for you, then we say go for it.
20% can also mean a lot of money, but if you have the financial capacity to do so, there is no reason to step away from it. After all, paying 20% down payment for one time is much more affordable compared to paying mortgage insurance per month with varying interest rates.
3 Ways to Avoid Paying For Mortgage Insurance
1) Put A 20% Down Payment
Getting a home loan is one way to achieve getting the house of your dreams quickly. But there are still people who find it cumbersome for the wallet. With that, insurance companies have found a way to build a bridge for these types of people.
One of the quickest ways to do it is through mortgage insurance because despite not having the financial capacity to cover 20% down payment, you will still get your house.
But for people who do not want to go through paying mortgage insurance, there are several ways to do so.
The most obvious approach is to not apply for mortgage insurance in the first place. However, when it is your first time purchasing a house, there is a high possibility for you to fall into these loopholes where you at first thought that you would need to get mortgage insurance to buy a house.
If that’s the case, another alternative to avoid paying mortgage insurance would be to get a piggyback loan. Doing so will immediately cancel your mortgage insurance, and then you won’t have to worry about paying it.
Another thing you can do is get a VA loan. However, this type of loan is only for military people who are qualified. This means you still need to check with your insurance agent.
You can also get a Lender-Paid Mortgage Insurance. This means the lender will be the one to pay your mortgage insurance. Of course, in return, you will have to pay the lender a higher interest for your home loan.
If those options do not seem to be viable for you, another alternative would be to find a lender who will not require you to get mortgage insurance despite your inability to fill in the 20% down payment. There are plenty of them around. You need to know where to look.
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2) Have Your Lender Pay For Mortgage Insurance
We mentioned in the previous paragraph that one of the best alternatives to avoid paying mortgage insurance is by getting lender paid mortgage insurance. In this section, we will talk about the process more thoroughly.
When buying a house, your best bet on getting an excellent deal lies on two things: one is your credit score. Another thing is your ability to offer down payment.
With lender-paid mortgage insurance, you can buy a house despite having only the capacity to pay 3% down payment. Of course, in return, the interest you will pay the lender for the house loan will be higher. However, in our opinion, a higher interest home loan is much better than paying for mortgage insurance yourself matched with the expenses of getting a house loan.
Getting lender paid mortgage insurance saves you a bit of money compared to getting mortgage insurance alone. However, the moment you decide to get a lender paid mortgage insurance, you can never take it back.
No matter if your house reaches 80% equity, you still need to push through with your lender paid mortgage insurance.
3) Get A “Piggyback Loan”
Another way to opt out of mortgage insurance as discussed a while ago is through getting a piggyback loan. However, for you to get started with this, you need to settle a down payment of 10%.
Usually, you will be arranged for 80% first mortgage, 10% second mortgage, and 10% down payment. But if you are more interested in buying condominiums, the most common piggyback loan would be in the form of 75/15/10. This is because condos are typically a lot more expensive compared to houses.
Most of the time, the second mortgage would be from your original lender. However, there are cases when your lender does not offer second mortgages. In this case, you need to find your own. Your most viable option would be to check with the bank associated with your house loan.
You can also look at other local banks, but you need to tell them firsthand that you are a purchasing a home. On top of that, you also need to decide on a final settling date for your house payment. Before finalizing the process, you need to let the bank know when your closing date is.
4) Meet The Loan To Value (LTV) Ratio
If you have already gotten a mortgage loan and you believe that you already invested enough money on it that just getting a new type of mortgage wouldn’t be worth it, the best thing you can do is to try and meet the loan to value ratio.
This means you have to move forward with the mortgage loan. Once your payment reaches 80%, the lender will automatically cancel your mortgage loan anyway.
5 Lenders That Offer Mortgages Without PMI
Here are some lenders that have programs that sometimes don’t require you to get mortgage insurance.
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Bank Of America
Affordable Loan Solution Mortgage is one of the most popular services of the Bank Of America. You can get your home sweet home with only 3% down payment. The best part is that you can do so without having to get a mortgage loan.
The only downside is that there is a maximum income limit when getting a home loan here. On top of that, you need to obtain counseling from the professional home counselors of Bank Of America’s network.
That’s not so bad of a requirement. If it is your first time buying a house, you will benefit a lot from getting professional counseling anyway.
Aside from the Bank Of America, Flagstar Bank also stands as one of the biggest international home lenders. They offer what many people call Professional Loan.
This type of loan is only available for people who have high earning potential but is still in stage 1 of their careers. For instance, if you work in a hospital as a nurse or doctor, you will have a pretty good chance of getting a passing mark for Professional Loan. More so, if you work as an executive or lawyer.
Aside from having zero mortgage loan requirements, the Professional Loan also has pretty low down payments.
Neighborhood Assistance Corporation of America (NACA)
If you categorize under the low to moderate incomes here in America, then NACA could be a good option. We think this is the best option whether you are a family guy or a person living by himself.
The reason is that this loan does not require any down payment, no points, as well as closing costs. Most importantly, there is no need for a mortgage loan.
The only downside, however, is that it’s not so easy to qualify for this type of loan. The company is serious about catering to low and moderate income only. With that, it might take a while to convince the company that you are in dire need of a home.
If you qualify for this type of loan, you could be lucky enough to get loans up to $453,100. What’s more is that you only need to pay 3% down payment. On top of that, there is entirely no mortgage insurance required to avail of this loan.
It’s important to note that CitiMortgage offers only fixed-rate loans. This means you need to settle fixed payments for several years.
For you to qualify for this type of loan, you need to be knowledgeable about being a homeowner. The good news is that it only requires a small percentage of your time to get familiar with this kind of things.
The rates for this type of loan is not mentioned on their website. So, you would need to visit their office to know if this is a viable option for you. We also recommend comparing the interest rates with other no mortgage insurance loans before you pull the trigger.
Getting mortgage insurance isn’t such a horrible thing. Sometimes, it is your best option to get a house in the quickest way possible. However, the most important thing to do is to explore your options.
Mortgage insurance does let you own a home a lot quicker, but it bears a lot of expenses in the long term. With that, if you can afford to let out a particular amount of money for a one-time payment, we say you skip the mortgage insurance. If not, don’t be afraid to seek the help of mortgage companies.
TLDR: A very simple way to get rid of mortgage insurance is to meet the 20% threshold.