What is mortgage Insurance?
If your down payment on a home is less than 20 percent of the appraised value or sale price, you must obtain mortgage insurance. Mortgage insurance sometimes is referred to as private mortgage insurance, or PMI. The cost of mortgage insurance varies depending on the size of the down payment and the loan. With mortgage insurance, the borrower pays the premiums, but the lender is the beneficiary. The coverage protects lenders against default by the borrower. If a borrower stops paying on a mortgage, the insurance company ensures that the lender will be paid in full. Mortgage companies pick insurance providers for their customers, but the borrowers have to foot the bill. Usually, they do so in monthly installments. But some lenders offer programs whereby the borrower pays the entire insurance premium in a lump sum at closing.
How to avoid Private Mortgage Insurance
Interest Buy Out. Some lenders will waive the mortgage insurance requirement if the buyer accepts a higher interest rate on the mortgage loan. The rate increase generally ranges from 3/8 of a percentage point, to a full percentage point, depending on the down payment. Borrowers can benefit from this because mortgage interest is tax-deductible, whereas mortgage insurance premiums aren't. But they'll end up paying more interest over the life of the loan because of the higher rate.
Use an 80-10-10 loan. This program involves getting two loans, sometimes referred to as a piggy back loan. The borrower gets a first mortgage equal to 80 percent of the sale price, a second mortgage for another 10 percent of the price and puts the remaining 10 percent down at closing. The second mortgage has a higher interest rate. But since it applies to 10 percent of the total loan, the monthly payments on the two mortgages can still be lower than the monthly payment on one home loan with mortgage insurance. Plus, interest on the second mortgage is tax-deductible. The 80-10-10 loan isn't the only plan available; borrowers can get 80-15-5 loans or other combinations.
Seller paid Single Premium MI. Mortgage Insurance companies also offer what is called a single premium to pay for the mortgage insurance. This is calculated to buy out the total cost at a discounted single lump sum. But due to new Government laws, there is what is called a Q M rule and because of this in order for the loan to work the seller will need to pay this signal premium. This will need to be negotiated and written into the purchase agreement.
The slow way: By waiting for your legal rights. If you pay your mortgage according to the payment schedule you were given when you first took out the loan, your mortgage insurance will eventually go away on its own. The lender is required by law to terminate your mortgage insurance when the loan balance is scheduled to reach 78 percent of the original value of the home.
By paying down your loan and crossing your fingers. If you pay down your mortgage to 80 percent of the home's original value, you can ask the lender to cancel your mortgage insurance. There is no guarantee the lender will say yes. This is different from simply having 20 percent equity in your home, based on the current market value. "Everybody thinks they can get rid of their mortgage insurance when they have 20 percent equity, but that's not really the case. Technically, borrowers must request the servicer to cancel mortgage insurance based on the current value of the home. But, generally, the borrower has to wait two to five years after taking out the loan to make the request, but then the lender can still reject it for a number of reasons.
The easiest, quickest way: Refinance. The easiest way to dump your mortgage insurance is a refinance because you are going to do a new appraisal, and if you establish you have 20 percent equity, and then you don't need mortgage insurance. If you don't have 20 percent equity but have some cash to pay down the mortgage, refinancing may still may be a better option than simply paying down the existing loan and hoping the lender will approve your request to remove the mortgage insurance. With a refinance you are in control.