How to Reduce Mortgage Insurance Costs
Mortgage insurance is a common term that is customarily being used by the insurance company agents and the realtors. The concept of mortgage insurance with all its complications gets really hard to be grasped by a common customer. You have probably come across the situation when a lender or an investor might have asked you for mortgage insurance while buying a home or property for you. In this article we are going to make the things super simple and easy to understand for you. Here we are going to discuss mortgage insurance and its types in general, while discussing various methods to reduce the mortgage insurance costs, in particular.
What is Mortgage Insurance?
Mortgage Insurance is aimed at compensating the unexpected loss that a lender or an investor may face in case of any event of default or foreclosure on the account of a borrower. It is when the borrower or the purchaser of the property pays a down payment of less than 20% as the lender has to put 80% of the amount at risk. Once the buyer is insured with a mortgage insurance, he will have to pay a fraction of percentage per annum or per month that will indirectly save the lender from any unforeseen or unexpected loss.
Though paying for mortgage insurance every month is a perfect substitute for not being able to pay more than 20% down payment for your home, it can also really disturb your monthly budget and put you in serious trouble. So, it is wise to look for some perfect options to lower your mortgage insurance costs.
Why do you need mortgage insurance?
1. The purpose of mortgage insurance is multifold. For instance, you urgently need to buy a separate home for your family but you are short of credits to make a full one time lump sum cash payment or even pay down payment above 20% then your lender will require a mortgage insurance document from you to remain on the safer side.
2. It is because you might not be able to pay for the rest of the installments or resale value of your home may be less than the amount of loan you have borrowed from the lender. So, the lender needs you to apply for mortgage insurance for his financial protection.
3. There may arise another scenario when you die soon after buying the home, so the mortgage insurance will help your family to live in the newly bought house without paying the mortgage or rent amounts for the rest of their life.
Types of Mortgage Insurance
There are certain types of mortgage insurance options available in the finance market. Mainly, there are two types of Mortgage Insurance. However, there are some other options available with little variations that can help you in various cases. Let’s go through these types one by one.
1. Mortgage Insurance Premium or MIP
Mortgage Insurance Premium, also called as FHA Mortgage Insurance Premium, is normally a government backed mortgage insurance plan that facilitates you in case of borrowing loans from the Federal Housing Administration (FHA).
In such a case, you are supposed to regularly pay your annually as long as the total life of the loan. However, if your down payment is more than 10% then MPI will be removed after a fixed duration of 11 years.
There are various ways to pay the MIP
You may commence the plan by paying an upfront mortgage insurance premium that roughly makes 1.75% 0f your total loan. Along with that, you are also required to pay an annual premium of 0.45% to 1.05% of the base loan amount.
2. Private Mortgage Insurance or PMI
Private Mortgage Insurance is applicable for the non-governmental or conventional loans. There are private mortgage insurance providers and agencies who can facilitate you in case you are not applying for FHA loans. It works on the same principles to ultimately make up for the unexpected loss of the lender in case of any event of default or foreclosure on the account of the buyer or borrower. However, it gets automatically canceled when Loan to Value ratio reaches upto 78%. That simply means the ratio of the base loan amount to the value of your property. Some banks or insurance providers remove the premium payment conditions when it touches 80%, however, according to a common rule it is 78%.
Comparison between MPI & PMI
The striking difference between the two is that the Private Mortgage Insurance is focused more on saving the lender from any loss in a situation when the borrower is unable to pay for his property. On the contrary, Mortgage Insurance Premium is more concerned with the plight of a borrower who may in case lose his job or may die then it will pay to save his newly purchased property.
The other difference is that you have to pay for MPI as long as your base loan amount is not paid fully, whereas you can cancel the PMI when your Loan to Value ratio reaches up to 78%.
Some Other Types:
There are some more options that you can avail with variations that may be compatible with your requirements.
A) Borrower Paid Mortgage Insurance
In such a type of Mortgage Insurance the premium is being paid by the borrower himself. Normally, when a lender ask you for a PMI, he is actually referring towards BPMI.
Most oftenly, you have to pay a 0.5% to 1% of the base loan amount every passing year till the end of your plan. For instance, you have paid 5% down payment on 100,000$ home then your base amount of loan will be 95000$ which roughly means that you have to pay 475$ to 950$ per annum and you can oversimplify this amount to calculate monthly premium amount by dividing on 12.
However, you can cancel the policy to stop paying premium after the half mortgage time duration that is 16 years for a 32 years mortgage time period. Else you can also withdraw from the plan when you have paid more than 20% of your house’s value that means your Loan to Value ratio has crossed the figure of 78%.
B) Lender Paid Mortgage Insurance
Lender Paid Mortgage Insurance refers to the case where lender himself pays for your Mortgage Insurance costs. In such case you will see a 0.25 to 0.50% rise in the interest rate for mortgage payment. However, it will compensate in a way that you don’t have to make 20% down payment for buying your property.
However, it doesn’t allow you to withdraw from or cancel the plan before time. Because all this is scheduled on the basis of your loan return time duration.
Mortgage Insurance Companies
There are various Mortgage Insurance companies that appear with attractive and catchy mortgage insurance plans to facilitate the home buyers in the best possible ways. To name a few, we are mentioning some of the most trendy and demanding mortgage insurance companies.
- Banner Life
- State Farm
- Haven Life
How Much the Mortgage Insurance Can Cost You
It is really not an objective question to reply with a certain figure because it all depends on numerous factors involved in it which control its price per annum. According to a general perception and rough estimation, you need to pay 0.5% to 1% per annum for your mortgage insurance plan.
Let us explore some of the price controlling factors for mortgage insurance.
- Thy type of your PMI.
- Nature of interest rate whether it is fixed or flexible.
- Total time period for loan return, known as mortgage term.
- More importantly, Loan to Value ratio.
- Requirement of your lender for mortgage insurance coverage amount.
- Value of your home and your credit score too.
- Some extra risk factors determined by your lender before the commencement of mortgage insurance plan.
Mortgage Insurance Calculator
Calculating mortgage insurance costs is no more a hard to crack activity. It is simply calculated by the percentage of total base loan amount i.e. if your base loan amount is 400,000$ then your annual premium will be 2000$ to 4000$ at the rate of 0.5% to 1% of the total loan amount. You can oversimplify it to get a monthly premium amount by using Mortgage Insurance Calculators which are especially designed for the same purpose.
Some Effective Ways to Reduce Mortgage Insurance Costs
Are you sick of paying monthly and annual premium for your mortgage insurance? Does it make you realize more burden on your pocket while hardly making both ends meet? Are you looking for some magical ways to reduce or get rid of mortgage insurance costs?
Then you are not alone mate! There are hundreds of people who suffer with this constant payment to be cleared duly in time each passing month or year. Let us explore some efficient ways to lower mortgage insurance premiums.
Invest more on Down Payment
This way suggests you to bring more money with you while sealing the deal for a new home purchase for you. Since, there is a criterion of getting yourself insured with PMI for not being able to pay a 20% down payment of the total value. So, you need to manage enough amount to at least pay the 20% down payment to avoid this nasty requirement of mortgage insurance premiums for long.
1. Prefer Conventional Loans
As it is confidently said with much evidence then government backed FHA loans and mortgage insurances charge you relatively more amount for mortgage insurance premium in contrast with PMI, so you need to prefer conventional loans. However, the problem with the PMI is that it is more focused at benefiting the lender solely.
2. Split Your Loan
For finding a master magical-trick, you should be wise enough to think out of the box to get rid of insurance premium worries. All you need is to split your loan scheme in two halves. Since (let’s say) you have paid a down payment of 10% for your loan, now go for a mortgage insurance for the 80% of your loan and also borrow an additional loan to pay the rest of the 10% to get rid of PMI in the first place. Though you will be charged little extra for the second loan, however you will successfully avoid yourself paying for PMI for anymore.
3. Maintain a Better Credit Score
Try to eliminate the average risk factor of your profile by becoming a less risky borrower. It can be achieved through improving your credit score that will take the lender in confidence. It must be at least around 760 or even above than that. Even a single degree of rise in your credit score or a slight improvement of your risk profile can help you in saving a considerably large amount.
4. Go for Refinancing
Refinancing your house is also a sharp move if you want to reduce mortgage insurance costs. If you think that the value of your house has grown to a decent level and loan to value ratio is also improved then you can tradeoff with your preexisting mortgage insurance with the newer one. So the lender will pay off the old one and replace it with new one with hopefully better interest rates and relatively more affordable options and, terms and conditions. This way you will cut the mortgage premium costs reasonably from your budget.
5. Try Refundable Premiums
Refundable mortgage insurance premium programs can be a sigh of relief while giving you a breathing space amidst uncontrollable expenditures. You need to look for refundable premium schemes offered by MIP or PMI. MIP or FHA mortgage insurance presents relatively better options for refundable premium if you are able to pay your loan within three years. However, Private Mortgage Insurance will charge you extra amount for upfront funding fee.
6. Know about the Cancellation and Automatic Termination Policies
You need to be well aware of Mortgage Insurance Premium policies to play safely. You can take help from any financial advisor to have clarity in your concept regarding the cancellation options or termination policy of mortgage insurance. Since you can cancel it after half of the time period of mortgage term has passed or your Loan to Value ratio has just surpassed 78%. Furthermore, if you have paid the 20% of your house value you can look for the cancellation of PMI. So it all needs clarity of thought to take the action timely and aptly.
The final takeaway of the discussion is that you should not be paying for mortgage insurance premiums for long, since you have got multiple options to reduce the mortgage insurance costs in 2023. It requires you to be well informed and follow a wise action plan to lower the mortgage insurance premium in a legal way.