What Is Mortgage Insurance? (And How to Avoid it!)
Many people today feel “insurance poor.”
But for as poor as we may feel, the reality is that having insurance products to protect your family and assets is a necessity. From car insurance to health insurance and everything in between — enter private mortgage insurance (PMI).
The process of applying for a mortgage can be daunting. There are a variety of different terms floating around that can make the process seem like an un-navigable maze.
Mortgage insurance is one of those terms.
At Embrace Home Loans, we are here to help you sort through the clutter and understand the process so that you get the mortgage you need and deserve.
What Is Mortgage Insurance?
Simply put, mortgage insurance is a policy taken out on your conventional loan that protects the lender in the event of default or foreclosure.
Of course, no one expects to default on their mortgage, but life isn’t always predictable and lenders need assurance that they will get their money back in the event your financial health takes a turn for the worst.
In this scenario, the lender is the beneficiary if you default on the mortgage loan for any reason.
The Pros & Cons of Mortgage Insurance
Having to pay PMI is not always negative, and there are actually a few advantages for borrowers when it comes to mortgage insurance.
For starters, having mortgage insurance may help you qualify for a loan that would otherwise not be approved, since the policy will repay the lender for a defaulted loan. As such, it lowers the risk for the lender.
A typical down payment for a home is 20% of the value. Mortgage insurance also allows for smaller down payments, which makes home ownership more attainable.
Unfortunately, mortgage insurance will increase the cost of your monthly loan payments since there’s an additional cost for it. It may also result in a higher interest rate for the loan based on increased risk to the lender.
Make sure that your lender explains mortgage insurance as it relates to the mortgage loan product you choose.
What Is a Mortgage Insurance Premium?
Just like with any type of insurance policy, a mortgage insurance premium is the payment you have to make to have mortgage insurance.
Monthly premiums are calculated based on a specific percentage rate of your total loan.
The mortgage insurance monthly premium is typically wrapped into your total monthly loan payment, although certain lenders will allow you to make one annual payment for it instead.
How Much Is Mortgage Insurance?
There are several factors that go into determining mortgage insurance premiums.
First is the amount of your down payment. The closer you can get to 20%, the better off you’ll be since your lender’s underwriting department will feel that you’re more financially vested in the house.
The other factor is your credit rating. The lower your credit score, the higher your mortgage insurance premium will be since a lower credit score means you are at a higher risk of defaulting.
You can try to keep the mortgage insurance rates low by saving for a larger down payment and keeping a clean credit record, but there are still additional factors to consider. Other pieces of the puzzle include rate structure (ARM vs. fixed), type of property, debt-to-income ratio, and the loan amount.
Just keep in mind that there are a variety of different loan products available to you, so be sure to do your homework so that you find the one that best fits your needs.
Choosing an experienced lending expert is also a wise decision, since this person will be able to help you better understand the in’s and out’s of mortgage insurance.
How to Get Rid of Mortgage Insurance
If you’re required to carry mortgage insurance, there is light at the end of the tunnel: you don’t have to keep it for the entire length of the loan. You can pay your loan down faster by paying more than the required minimum each month, which will help you build equity in the home faster.
Once you have at least 20% equity in the home, you can request to eliminate the mortgage insurance premium all together. Plus, the lender is required to eliminate the mortgage insurance premium when your loan-to-value ratio hits 78%.
- Be a model borrower. Make your payments on time, all the time. If you prove yourself to be responsible, you may be able to negotiate with your lender to lower your mortgage insurance payments, or possibly even remove them all together. Usually, at least 24 months of stellar payment history is necessary.
- Monitor your home’s value. If your house has appreciated in value, your loan-to-equity ratio will improve. This change could be significant enough to establish that you have enough equity in the house to drop the mortgage insurance all together.
Wrapping Things Up
Mortgage insurance may seem like a necessary evil, but it just may be the deciding factor in your ability to purchase the home of your dreams.
The good news is that it’s not a life sentence, and there are ways to reduce and/or eliminate mortgage insurance by being a diligent borrower who:
- Keeps track of the equity in your home
- Maintains high credit scores
- Always makes payments on-time
There’s no need to fear mortgage insurance, you just need to make sure you understand what factors affect the monthly premiums, as well as ways you can eliminate it.
Contact Embrace Home Loans Today
Working with a caring and trusting lender is also a strategic move that can pay off in spades in the long run.
At Embrace Home Loans, we have over 30 years of lending expertise and experience, and offer a wide range of products that’ll ensure that the mortgage you’re approved for is the one that makes the most financial sense.