Mortgage Insurance 101
Posted by Client Care on Tuesday, May 14th, 2013 at 10:23pm.
Buying a home is not only an exciting adventure, but for some it is the path to financial security through personal equity. For this reason, it is extremely important that when you are preparing to buy a home that you understand fully all the costs associated with the process and the home itself. Unlike renting, homeowners who finance their home are required to hold at least two different kinds of insurance, homeowners insurance and mortgage insurance. These two policies are very different and both add to your monthly payment on the home. Homeowners insurance is pretty simple to understand, since it usually mirrors the kind of renters insurance you probably previously had only with more coverage. Mortgage insurance is not so clearly defined for some and is often loathed by homeowners. Here we will examine exactly what mortgage insurance is, who needs it, and how to reduce or eliminate your payments.
Mortgage insurance benefits the financial institute that actually owns the loan you have to take out on your home. In the real estate world, mortgage insurance or private mortgage insurance (PMI), is required for the most common forms of home loans including FHA and conventional loans. This insurance is held to ensure that if the loan falls into default, the lender will receive payments to offset the bad debt.
Mortgage insurance is usually required on all loans that do not meet the standard 20% down payment or have not yet reached 22% equity in the home. The amount you will pay in mortgage insurance is calculated on what they call 75 basis points or more plainly, .0075% of the total financed amount. This figure is then divided by 12 months to equal your monthly responsibility, which is then added to your monthly mortgage payment. Because this amount is seen as a liability by the lender, most will require you have to have twice that amount coming in as part of your income to offset that debt when they are considering your debt to income ratio for initial approval.
So, the trick to getting around mortgage insurance is to satisfy the 20% requirement up front. If this cannot be done, there are few things you can do down the road that will help you eliminate or reduce this payment, which will ultimately decrease your monthly responsibility. For example, refinancing to a conventional loan or a HARP 2 loan from a government funded loan will usually lessen your payment substantially. Additionally, you could work on increasing your credit score to 760 or higher and reducing your loan-to-value amount to 85% or less by getting a new appraisal. Lastly, you would need to increase the equity in your home to the 22% required by most lenders and be proactive in requesting the PMI be removed from your loan at that point.
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