Actual Ways of Avoiding Mortgage InsuranceNameless Soph
Lately, we often hear from potential homebuyers that they would like to avoid mortgage insurance on their home loans.
We’re not sure how mortgage insurance got such a negative reputation but we would want to dive into the topic and explain why it can be a useful tool when buying or refinancing a home loan.
Why does Mortgage Insurance even exist?
Mortgage insurance exists because the lender decided that an 80 percent loan to value is the greatest level of risk that the lender is prepared to bear without insurance.
Mortgage insurance is simply a policy that protects the lender in case of a default. If mortgage insurance wouldn’t exist, you would need to pay a 20% down payment to purchase or refinance a house.
The Actual Cost of Mortgage Insurance
Mortgage insurance may also be seen as the expense of borrowing the difference between 80 percent and the amount of down payment you have. When you think about it this way – that’s the cheapest money you’ll ever borrow!
It’s far less expensive than any personal loan or credit card condition, with average mortgage insurance added varying from 50% to 85%.
Even if you have the money for a down payment, putting it into your home equity makes it untouchable and possibly extremely costly in the future.
You are more ‘flexible’ if you keep your reserves. The cost of investing that money in equity includes the risk of higher interest rates in the future if you have to refinance to get that money out.
Three Ways to Avoid Paying Mortgage Insurance
Just because you shouldn’t be afraid of mortgage insurance doesn’t mean you should enjoy paying it. There are various options for getting out of mortgage insurance with less than a 20% down payment.
1. Outstanding Credit Programs
Some lenders have useful connections with mortgage insurance underwriters that allow them to offer lender-paid mortgage insurance to borrowers with especially high credit scores without boosting interest rates. This is a frequent technique and an excellent strategy to convert non-deductible mortgage insurance into deductible mortgage interest.
The cost of mortgage insurance is often integrated into your interest rate, resulting in a slightly higher rate over the life of your loan.
For borrowers with a credit score of 760 or above, these programs provide lowered interest rates.
These programs will offer up to 97 percent loan-to-value for qualifying borrowers with low to average incomes. This price range is usually restricted to the conforming loan maximum in your county.
2. Piggyback Loan
For homebuyers with as little as a 10% down payment, there is a boom of second mortgages and home equity line of credit programs on the market. These programs allow you to take out the first mortgage with an 80 percent loan to value, avoid mortgage insurance and then take out a second mortgage or home equity line of credit to bridge the difference up to 89.99 percent loan to value.
Piggyback mortgages are often reserved for clients with higher credit scores; however, there are programs available with interest rates in the low double figures for borrowers with lower credit scores.
3. Just Buy-Out your private mortgage insurance
For traditional mortgages with private mortgage insurance, most lenders can provide a buy-out option. This ‘buy-out’ is determined by your credit score and the loan-to-value ratio of the purchase. Buying out your PMI can cost up to 3.29 percent of the loan amount with 5% down and a 680 credit score, or 1.92 percent with a 760 credit score on the same situation. This is your FICO range viewpoint.
FHA mortgage insurance has the same cost of 85 percent regardless of loan to value. When you use private mortgage insurance on a traditional loan, your interest rate decreases as your loan-to-value ratio does. With 10% down and a FICO of 760, the buyout is just 1.37 percent of the loan amount, as an example of finding an economical sweet spot.
If you only have a 15% down payment, your buyout will be less than 1%.
Note: The funds for this buyout can come from a seller credit and/or a lender credit; they do not have to come from your own pocket.
Not all lenders can provide you with these programs. If you feel like you’d like to use one of the options mentioned above, look for a lender who has access to good credit programs or second mortgages, just like LBC Mortgage has.
Some of these solutions will need some creativity on the part of your lender. The more experienced your loan officer is, the more probable it is that you will be provided with the best option for you.