One of the costs associated with buying a home is the mortgage insurance. It is designed to protect the lender in case you default on mortgage payments.
Buying a home is an exciting and complicated process. It’s a significant investment, and you want to make sure you’re making the right decisions. One of the biggest costs associated with buying a home is mortgage insurance. Mortgage insurance can add a significant amount to your monthly mortgage payment, making it harder to afford your dream home.
However, there are ways to save money on mortgage insurance. In this article, we’ll explore the different types of mortgage insurance, factors that affect mortgage insurance premiums, and tips and tricks for saving money on mortgage insurance.
Understanding Mortgage Insurance
Mortgage insurance is a type of insurance that protects the lender if you default on your mortgage payments. If you have a conventional loan and make a down payment of less than 20%, you’ll be required to pay for mortgage insurance.
This insurance is designed to protect the lender in case you default on the loan. It’s important to understand that mortgage insurance doesn’t protect you as the borrower. It only protects the lender.
Types Of Mortgage Insurance
Private mortgage insurance is required for conventional loans, while government mortgage insurance is required for FHA and VA loans.
Private Mortgage Insurance (PMI)
Private mortgage insurance is required for conventional loans when the borrower makes a down payment of less than 20%. PMI is typically paid monthly and can add several hundred dollars to your monthly mortgage payment. The cost of PMI varies depending on the size of your down payment, the loan amount, and your credit score.
Government Mortgage Insurance
Government mortgage insurance is required for FHA and VA loans. FHA loans require mortgage insurance premiums (MIP), while VA loans require a funding fee. Both MIP and funding fees are one-time fees that can be rolled into your loan amount. The cost of MIP and funding fees varies depending on the loan amount and other factors.
Factors That Affect Mortgage Insurance Premiums
Several factors can affect your mortgage insurance premiums, including your down payment, credit score, loan amount, and loan term. Understanding these factors can help you save money on mortgage insurance.
Mortgage insurance is typically required by lenders when the borrower puts down less than 20% of the home’s purchase price as a down payment. The premiums for mortgage insurance can vary depending on several factors, including:
- Loan-to-value (LTV) ratio: The LTV ratio is the amount of the loan compared to the appraised value of the home. The higher the LTV ratio, the higher the mortgage insurance premium.
- Credit score: Borrowers with higher credit scores are typically seen as less risky by lenders and may have lower mortgage insurance premiums.
- Loan term: The length of the loan can affect the mortgage insurance premium. Longer loan terms may result in higher premiums.
- Type of mortgage: The type of mortgage can also affect the mortgage insurance premium. For example, FHA loans have different mortgage insurance premiums than conventional loans.
- Property type: The type of property being purchased can also affect the mortgage insurance premium. For example, investment properties may have higher premiums than primary residences.
- Location: The location of the property can also affect the mortgage insurance premium. Properties in areas with higher risk of natural disasters or other hazards may have higher premiums.
It’s important to keep in mind that mortgage insurance premiums are typically added to the monthly mortgage payment, so it’s important to factor in these costs when budgeting for a home purchase.
Additionally, once the borrower’s equity in the home reaches 20%, they may be able to cancel the mortgage insurance or have it automatically removed, depending on the type of mortgage and other factors.
Down Payment
Your down payment is one of the most significant factors that affect your mortgage insurance premiums. The more you put down, the lower your premiums will be. If you can make a down payment of 20% or more, you can avoid paying mortgage insurance altogether.
Credit Score
Your credit score is another critical factor that affects your mortgage insurance premiums. If you have a credit score of 740 or higher, you can qualify for the best rates on mortgage insurance.
Loan Amount
The loan amount is another factor that affects your mortgage insurance premiums. The higher your loan amount, the higher your premiums will be. If you’re considering a jumbo loan, expect to pay higher mortgage insurance premiums.
Loan Term
The loan term is the length of time you have to pay back your mortgage. The longer your loan term, the higher your mortgage insurance premiums will be. If possible, consider a shorter loan term to save money on mortgage insurance.
How To Save Money On Mortgage Insurance
Now that you understand the different types of mortgage insurance and factors that affect your premiums let’s explore some tips and tricks for saving money on mortgage insurance.
Increase Your Down Payment
As mentioned earlier, your down payment is one of the most significant factors that affect your mortgage insurance premiums. If you can make a down payment of 20% or more, you can avoid paying mortgage insurance altogether. If you can’t make a 20% down payment, consider saving up for a larger down payment to reduce your premiums.
Improve Your Credit Score
Your credit score is another critical factor that affects your mortgage insurance premiums. Improving your credit score can help you qualify for better rates on mortgage insurance. To improve your credit score, make sure you’re paying your bills on time, keeping your credit card balances low, and avoiding new credit inquiries.
Refinance Your Mortgage
If you’ve been in your home for a while, you may be able to refinance your mortgage and save money on mortgage insurance. Refinancing can help you get a lower interest rate or a shorter loan term, which can reduce your mortgage insurance premiums.
Shop Around For The Best Rates
When you’re buying a home, it’s essential to shop around for the best rates on mortgage insurance. Different lenders offer different rates, so it’s important to compare quotes from multiple lenders. Make sure you’re comparing apples to apples when it comes to mortgage insurance quotes.
Avoid Mortgage Insurance Altogether
If possible, avoid paying mortgage insurance altogether. You can do this by making a down payment of 20% or more, or by taking out a piggyback loan. A piggyback loan is a second mortgage that you take out to cover the cost of your down payment. This loan can help you avoid paying mortgage insurance altogether.