October 11, 2013
In today’s local housing market, a large share of Home Buyers will put less than 20% down. So the conversation about Mortgage Insurance begins.
But inevitably, many of those Buyers say “I don’t want to pay PMI”, or “I heard there were loans that didn’t have mortgage insurance”, or “I saw this ad online …”
You get the picture.
So when it comes to paying monthly mortgage insurance on your home loan, whether you are buying a home, or refinancing your current mortgage loan, is there a way to avoid paying this extra cost that everyone wants to avoid?
You’ve decided to buy a brand new house, so you call me and ask, “What do I need to do to get started?” One of the first questions I’ll ask you, is “how much you plan to put down on this home purchase?”. If it’s anything less than 20%, we may have to start talking about mortgage insurance.
But wait a second! You don’t want to pay mortgage insurance, right? You’ve heard about these loan programs, or saw online where you didn’t have to pay it … however, I’m here to tell you that if you are going to put less than 20% down on virtually ANY loan program out there, you will have to pay mortgage insurance or some variation thereof on your home loan.
Let me explain what mortgage insurance really is – and trust me, it’s not there to pay off your mortgage in the event that something happens to you.
For instance: if you default on your mortgage and don’t make your house payments, the bank will go to the mortgage insurance company and say they took a loss on your loan. The insurance company will then cut the bank a check for anything above 80% loan-to-value that you still owed on your loan balance.
Mortgage insurance is there to protect the lender – it’s basically a policy protecting the bank for the risk they took on you with a smaller down-payment.
How does mortgage insurance factor in when obtaining your loan?
If you happen to have military background and are applying for a VA loan, you technically don’t have to pay mortgage insurance monthly. However, they do charge a big funding fee, which can be up to 2% or even 3% of the loan amount, and this is added to your mortgage loan balance. You are still paying for it; it’s just financed into your payment over the next 30 years.
Here’s how the major home loan programs treat mortgage insurance:
FHA does a combination of charging you an upfront fee and then a large amount in your monthly payment. So you end up paying for it on both sides of the deal, and the monthly portion will be there for the life of the loan.
USDA loans are very similar. They charge a larger amount upfront, added to your balance, and a smaller amount monthly.
Conventional – this is the most common type of home loan – and the only kind that gives you multiple options on how to pay mortgage insurance.
The traditional way is pay mortgage insurance is by paying it monthly, but there are methods to eliminate that completely.
Take a look at these examples:
Let’s say you are buying a house for $250K. You have excellent credit, good debt ratios, and you’re putting 5% down. You would be looking at a ballpark figure of $100 or $110 for monthly payments (no upfront fee).
You could do a “split premium”, where there’s an amount up-front, and a less on the monthly payment side.
However, if you don’t want to pay it monthly at all – because remember, you called me and said you don’t want that extra payment! – then you have the option to do a lump sum, also known as a “single premium”. This one-time payment at closing wipes the mortgage insurance out completely, meaning nothing more to pay monthly.
One of the most popular ways to get rid of paying monthly mortgage insurance is financing it. This would mean as long as we stay within the loan-to-value ratios, we can tack that mortgage insurance single-premium onto your balance. So instead of paying $110 a month, it may only raise your payment $15 or $20 a month – and again, you’d be done with it.
It’s not necessarily a bad thing to carry mortgage insurance! It’s more about how you have to pay for it.
There are a lot of different options available…we can even work on helping you get the seller to pay for it. We will find the right plan for you, so you can still buy or refinance your home, without needing a 20% down-payment, or equity in your home.
Give me a call at 503.698.5801 or visit me at www.CallNewman.com and let’s go over the details of your next home loan. I’ll personalize your specific numbers and work with you to avoid that large monthly payment.