Webster’s dictionary defines mortgage insurance as an evil monkey that sits on your back, steals your money every month, and gives you nothing in return. Well, that’s not exactly true. What is true is that mortgage insurance is a psychological thorn in the side for many people, since it is a fee that has to be paid for no other reason than to safeguard a lender from a borrower default.
In most cases, mortgage insurance comes into play when a person can’t afford to put down 20 percent of a home’s purchase price. It is usually a monthly premium based on the amount of money that was originally financed, which protects the lender’s interests in the event the borrower is unable to fulfill his or her obligations.
The benefit of mortgage insurance is that it allows people who don’t have tens of thousands of dollars in savings to achieve the dream of home ownership, thus contributing to the stability of our communities and our nation. One of the major disadvantages is that mortgage interest is not tax deductible.
There are two types of mortgage insurance: the mortgage insurance associated with FHA loans, and private mortgage insurance, which is associated with conventional loans. FHA loans were designed to provide a pathway to home ownership for people with no other options. These types of loans originate from the government and mortgage insurance is required for the life of the loan.
With conventional loans, mortgage insurance can be eliminated once a borrower has approximately 20 percent equity in the property. Another way of saying it is that when the loan-to-value ratio hits 80 percent or higher, the mortgage insurance can be avoided. The mortgage insurance may automatically be canceled at this point or the borrower can request for cancellation when there is 20 percent equity in the property, based on the current market value.
Is there a way to get out of it sooner?
With FHA loans, the only way to avoid paying mortgage insurance is to refinance. For conventional loans, refinancing can also be a viable strategy for eliminating mortgage insurance. I have a fundamental disagreement with the idea of mortgage insurance, so I often advise my clients to pursue any option that might allow them to avoid it.
As an example, many folks choose a loan with the lowest possible interest rate. In the vast majority of cases, these types of loans require the borrower to have mortgage insurance. Choosing a loan with a higher interest rate might be the best option for many people, since the result can often be lower payments and no mortgage insurance.
What’s surprising for many people is that it’s not about the rate. In many cases a higher rate simply allows for more flexibility. After all, who wouldn’t want a lower payment? Having a higher interest rate allows me to help people refinance with no closing costs. Plus, who wouldn’t want to avoid mortgage insurance? The draw for purchasing a home for many people is to make a solid investment and avoid throwing money away each month in the form of rent.
Mortgage insurance doesn’t help anyone but the lender, especially once a borrower is already in a property. My belief is that most people will see the value in not having mortgage insurance and will seek to avoid it at all costs.
Of course, the only sound advice related to the financing of a home is advice that is specifically tailored to an individual’s unique financial situation and goals. For a comprehensive, no obligation assessment of the options that might be available to you, pick up the phone and give me a call or shoot me an email. I’m always happy to work with new clients and look forward to the opportunity to help you achieve your goals.
Patrick Stoy has 15 years of mortgage lending experience. Patrick is CEO of Wilmington-based Market Consulting Mortgage, which he started in 2005 with a mission to build lifelong customer relationships by providing real value. To learn more about Marketing Consulting Mortgage, visit www.macmtg.com. Patrick can be reached at [email protected] or 910-509-7105.
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