Actual Ways of Avoiding Mortgage Insurance

Actual Ways of Avoiding Mortgage Insurance

Lately, we often hear from potential homebuyers that they would like to avoid mortgage insurance on their home loans. We understand that. 

But 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.

What’s 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 0.3% to 0.85%.

Even if you have the money for a down payment, putting it into your home equity makes it untouchable and possibly 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.

And finally, 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. Lender Paid Mortgage Insurance 

Most lenders offer lender-paid mortgage insurance options, which means that mortgage insurance will be paid by the lender but the cost of it will be built into the rates, so rates are usually a bit higher in these options.

These programs will offer up to 95 percent loan-to-value for qualifying borrowers. This price range is usually restricted to the conforming loan maximum in your county.

  1. 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

  1. Mortgage insurance Buy-Out

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 percent of the loan amount.

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.

So, if you have more questions about your PMI – please don’t hesitate to ask here in the comments or give us a call, we’ll be more than happy to give you the answers.