Mortgage insurance protects the lender. It lowers the lender’s risk when lending to homebuyers with less than 20% down. There are some people that think it protects the buyer, but it actually protects the lender. If you defaulton your loan, the lender can foreclose but frequently the foreclosure sale proceeds may not cover the amount you owe plus legal costs. Mortgage insurance helps to make up the difference. This allows lenders to borrow more money on your home – meaning you can put less than 20% down – frequently first time homebuyers may only put 3% down.
The basics of mortgage insurance are:
- Mortgage insurance is a policy the borrower pays for but it benefits the lender.
- Mortgage insurance pays the lender if you default on your home loan
- You can avoid paying mortgage insurance if you have 20% or more down on the purchase of your home.
The cost of mortgage insurance varies. It will depend on your credit score and your down payment – it may also depend on the type of loan you are doing. For those with credit scores over 760, the rates are very low. Sometimes clients think about pulling money from a retirement fund to avoid mortgage insurance, but check with your lender first -the rates may be low enough that it may not make sense to do that. Others think about a second mortgage (think 80/10/10) to avoid MI. That can work but again, with interest rates increasing, it may not make sense.
Depending on your tax situation, you may be able to write off your mortgage insurance. For 2017, if you met the income guidelines, your mortgage insurance was deductible on your taxes.
Another option with mortgage insurance is a lender paid policy. Talk to your loan officer about your options. Most use a monthly payment that goes away once you have enough equity. Others may use a slightly higher interest rate to cover the mortgage insurance. Think about how long you plan to be in the home and when you might have enough equity to eliminate it, maybe it’s worth having a higher interest rate to avoid the monthly payment.
Make sure you pay attention to your equity. Mortgage insurance does go away on conventional loans. You need to reach 78-80% of the original value – or have an appraisal done to show your current value. Talk to your current servicer to see what your requirements are before you order an appraisal.
Mortgage insurance is not all bad- it has a bad name, but it does allow you to purchase a home with a small down payment! Remember you will gain equity on your home – at least we hope so! If you can purchase now rather than waiting to save that 20% down, think about the equity you can gain over the years! It definitely can be worth the cost of mortgage insurance!
Leslie Vanderwerf, NMLS ID#335509, American Mortgage & Equity Consultants, Inc., An Equal Housing Lender, NMLS#150953 – Email – Website
