What is mortgage insurance? If you didn’t pay attention to the fine details of your closing paperwork, you may not realize that the extra charge of PMI or mortgage insurance is something you would be paying each month. If you own a home and owe more than 80% of that home through your mortgage, you will probably have mortgage insurance on your account. The catch is, though, that the insurance is not going to go away after you have dropped the amount you owe below that.
What Is It?
The first thing to understand is just what mortgage insurance is. Like any other insurance premium you will pay, it safe guards against something that may happen in the future. In this case, that something is you defaulting on your loan. The insurance you are taking out protects the lender from this default, in which they would lose money. By having this insurance, your lender may provide a lower rate or they may be more willing to lend to you in the first place. Nevertheless, it is not a mandatory thing and it doesn’t have to stay there for the life of your loan.In other words, the premium that you are paying per month on your mortgage insurance is money coming from your pocket that you just don’t have to pay. So, how can you get rid of it?
Avoiding The Premiums
There are a couple of things you can do to avoid having to pay for mortgage insurance. It starts by selecting the right loan, or should that be the right loans. When you purchase your home; instead of purchasing just one loan, purchase a first and second mortgage in conjunction. Here’s a great example. Your first and primary mortgage would be for 80% of the homes value. Your second mortgage would be for 10% of your home’s value and that final ten comes into play with a down payment. In this case, there would be no reason for mortgage insurance.Or, look for a mortgage lender that offers something called a self insured program. You may have to pay a bit more in interest for these loans. Yet, the catch comes in when you consider tax time. While your mortgage insurance premiums are not tax deductible, the additional interest would be.
But, I Have It, Now What?
If you already have mortgage insurance and you aren’t sure what to do about it, there are several solutions for you here, too. For one, you should contact your current lender and ask them about their policies. In most cases, they will have a requirement in place for this to happen. For example, you may need to have the lender’s approved appraiser come out and do an appraisal on the home (which you are likely to pay for.) If it appraises correctly, the lender will then allow you to drop the mortgage insurance.Another solution is a bit more time consuming, but works too. In this case, you would refinance your home’s mortgage altogether and end up with a mortgage for less than 80% of the home’s appraised value. In this case, you would not need to have the insurance for your new loan. The problem with this scenario is that it could be more costly to do this in the long term.The best course of action for you to take depends on your specific situation. Your mortgage insurance payments, though, are not going to help you to pay down your home any faster in the method that money is being used in right now. Unless you default on your home loan, this is money that is wasted to you. Talk to your financial planner for a long term objective in reducing your home’s owed amount below the required 80%. Talk about the long term benefits of disadvantages of any of the above scenarios. Whatever you do, don’t waste your money on a mortgage insurance premium that is doing nothing for you.