Mortgage insurance is a premium that some homeowners pay in order to protect their lender in case of default. By paying mortgage insurance, your lenderâ??s exposure to financial loss is limited or even eliminated. While youâ??re on the hook for paying the premiums, paying for mortgage insurance can actually help put you in a home sooner than you might expect.
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Why Pay Mortgage Insurance
The primary reason to pay mortgage insurance is if you do not have enough equity in the home when you purchase it. Most lenders require you to pay mortgage insurance for one of two reasons–if your down payment is less than 20 percent of the homeâ??s value, or if you are financing a loan that is more than 80 percent of the homeâ??s value.
Why Itâ??s Important
Mortgage insuranceâ??s importance to lenders is obvious because it protects the lender. But there are benefits for you as well. Say your home loan falls into one of the two categories that requires mortgage insurance. By paying for mortgage insurance, the lender is much more likely to approve your loan so you can purchase the home. Without it, those that might qualify for home ownership would fall short. Mortgage insurance makes the lender more apt to take a risk on you. In addition, a federal law passed in 2007 allows you to deduct mortgage insurance payments on your income taxes.
There are many factors to consider before deciding to get mortgage insurance. First, note that mortgage insurance is factored by the entire loan, not the amount over 80 percent of the homeâ??s value. Consider whether the loan is a fixed-rate loan or a variable-rate loan. That can influence the mortgage insurance rate. Smaller loans can feature higher mortgage insurance rates. One way to figure the mortgage insurance rate is to take the total loan and divide it by the portion above 80 percent of the homeâ??s value. Then, multiply that by the annual insurance premium. That provides you with the number to add onto the loanâ??s interest rate, giving you a ballpark figure on the mortgage insurance rate.
How To Pay
There are three different payment options. First, you can choose to pay the first yearâ??s mortgage insurance when you close on the home, and then pay the premiums monthly after that. Second, you can pay monthly premiums starting at closing. The monthly premium goes down, but the total youâ??ll pay over time goes up. You can even make a one-time total payment at closing, but in most cases this is done by rolling the insurance cost into the loan and paying it off as part of the mortgage. It does increase the monthly payment. There are also refundable and non-refundable options, with non-refundable options offering a small savings.
Ending the Policy
The easiest way to get rid of the mortgage insurance is to make your monthly mortgage payments and reduce the principal loan amount to less than 80 percent of the homeâ??s cost. In that case, you can petition your mortgage company to have it removed. Some companies automatically cancel the policy if what you owe drops below 78 percent of the homeâ??s value. If you think your homeâ??s value has increased to the point where it puts you below 80 percent, you can have the home reappraised and present the new value to your lender. If the FHA guaranteed your loan, you must pay the insurance for five years and until your loan falls below 80 percent.