Insights, Mortgages & Renting

How to Avoid Mortgage Insurance: The Complete Guide

flik eco finance personal how to avoid mortgage insurance

Mortgage insurance can be a huge expense for home buyers. In this guide, we will teach you how to avoid mortgage insurance altogether. We will cover all of the different ways that you can avoid paying for mortgage insurance, including government programs, private lenders, and more. By following our tips, you can save yourself a lot of money!

What is Mortgage Insurance?

Mortgage insurance is an insurance policy that protects the lender in the event that the borrower defaults on their mortgage payments. The insurance policy is paid for by the borrower and is usually required if the borrower has a down payment of less than 20% of the purchase price of the home.

What Are The Different Types of Mortgage Insurance?

There are two types of mortgage insurance: private mortgage insurance (PMI) and Mortgage Insurance Premiums (MIP). PMI is a type of insurance that homebuyers with conventional loans can avoid by making a down payment of 20% or more. MIP is a type of insurance that all FHA borrowers have to pay regardless of how much they put down.

How Much Does Mortgage Insurance Cost?

The cost of mortgage insurance depends on several factors, including the size of your down payment, the loan-to-value (LTV) ratio of your loan, and your credit score. For example, if you make a small down payment on a $200,000 home with an LTV ratio above 80%, you can expect to pay around $100 per month in mortgage insurance.

How to Avoid Mortgage Insurance

The easiest way to avoid mortgage insurance is to make a down payment of 20% or more when you buy your home. If you can't do that, there are a few other options available to you:

  • Get a conventional loan instead of an FHA loan. You'll still need to put down at least 20%, but you won't have to pay MIP.
  • Apply for a Piggyback loan. This is where you take out two loans – one for 80% of the purchase price, and one for 20%. The first loan will likely have PMI, but the second one won't.
  • Get a VA loan. If you're a veteran, you may be eligible for a VA loan, which doesn't require any down payment at all. Unfortunately, this option isn't available to everyone.

How can You Get Rid of PMI Without 20% Down?

You're not stuck with PMI if you don't want it. You can get rid of it by paying your mortgage down to 80% loan-to-value ratio, or LTV. The easiest way to do this is simply make extra payments until you reach an 80% LTV.

Once your LTV reaches 80%, you can contact your lender and ask them to cancel your PMI. You'll need to have proof that your LTV is indeed at 80% or below in order for them to remove the insurance from your monthly payment.

If you don't want to wait to reach an 80% LTV, you can also refinance your mortgage once you've reached a 20% equity position in order to get rid of PMI. Keep in mind, however, that you'll need to pay closing costs associated with the new loan.

So there you have it! Those are a couple of ways you can avoid or get rid of mortgage insurance without putting down 20% on your home.

Is PMI Tax Deductible?

No, PMI is not tax deductible. The Homeowners Protection Act of 1998 states that PMI cannot be tax deductible. This applies to all mortgages obtained after December 31, 1999. So if you're currently paying PMI, or are thinking about taking out a mortgage with PMI, you won't be able to deduct the premium on your taxes. Sorry!

But there is some good news: Once you reach 22% equity in your home (meaning you've paid down your mortgage enough that you own at least 22% of your home outright), you can request that your lender cancel your PMI. And once it's canceled, it can't be reinstated, even if you stop making payments on your mortgage or default on your loan. So once you reach that 22% equity mark, make sure to contact your lender and request that they cancel your PMI.

What if I Have an FHA Loan?

If you have an FHA loan, you're required to pay both an upfront mortgage insurance premium (MIP) and an annual MIP. The upfront MIP is paid at closing and is equal to  of the loan amount. The annual MIP is paid in monthly installments and is currently 0.85% of the loan amount (divided by 12 months). So on a $200,000 loan, your upfront MIP would be $2000 and your monthly MIP would be $142.50 ($200,000 x 0.0085, divided by 12 months).

Unlike with conventional loans, you can't cancel FHA mortgage insurance once you reach 20% equity in your home. You'll be required to pay MIP for the life of the loan. However, there are some ways to get around this. If you refinance from an FHA loan to a conventional loan, you can avoid paying MIP altogether. Or if you sell your home and pay off your mortgage balance, you'll no longer be required to pay MIP.

Can An Appraisal Remove PMI?

The short answer is "no", an appraisal cannot remove PMI from your mortgage. The reason for this is that PMI is a type of insurance that protects the lender, not the borrower. Therefore, it would make no sense for the lender to cancel the insurance if the property value has decreased.

What you can do, however, is refinance your mortgage once you have built up enough equity in your home. If you are able to get a new loan with a lower interest rate, you may be able to avoid paying PMI altogether.

If you are still struggling to avoid paying PMI, there are a few other options available to you. You could try to negotiate with your lender or look into government-sponsored mortgage programs. Whatever you do, make sure you are well-informed about all of your options before making a decision.

If you're not able to avoid paying PMI, don't despair. You can still put your money to good use by making extra payments on your mortgage principal. Doing so will help you build equity in your home and eventually get rid of PMI for good. So even though it's not ideal, there is a light at the end of the tunnel!

Can Refinancing Get Rid of PMI?

If you're current on your mortgage, you may be able to refinance at a higher loan-to-value ratio and avoid paying PMI.  You'll need to have good credit and enough equity in your home to qualify for the new loan. Mortgage insurance is required when you have a conventional loan and make a down payment of less than 20 percent of the home's purchase price. It protects the lender if you stop making payments on your mortgage.

Do All FHA Loans Have PMI?

The quick answer is that all FHA loans require mortgage insurance. The name for this type of insurance is "private mortgage insurance," or PMI for short. You pay PMI as part of your monthly mortgage payment.

FHA loans are available with both fixed rate and adjustable rate mortgages (ARMs).

With a fixed rate loan, your interest rate and monthly payments will stay the same for the entire life of the loan. An ARM starts out with a lower interest rate than a fixed-rate loan, but after an initial period (usually five or seven years), the interest rate can go up or down depending on market conditions.

If you have an ARM, your monthly payment may change from year to year, but the amount of mortgage insurance you pay will not go up or down.

So how can you avoid paying PMI on an FHA loan? The best way is to put down a larger down payment. If you put down at least ten percent, you can usually avoid PMI altogether. Another way to avoid PMI is to have the lender agree to hold off on requiring it for a certain period of time, such as five years. This is called a "temporary buydown." Of course, this will likely result in a higher interest rate.

PMI can be expensive- typically around $100 per month for every $100,000 borrowed. But there are ways to get around it if you're willing to put in a little extra effort. By following the tips above, you can avoid paying PMI on your FHA loan.

Is Mortgage Insurance Compulsory?

The short answer is no, you don’t have to have mortgage insurance.  Mortgage insurance protects the lender in case you default on your loan.  If you feel confident that you can make your monthly payments without fail, then it may not be worth paying for mortgage insurance.

Mortgage insurance is typically required if you put down less than 20% when buying a home.  So, if you have the cash available, making a larger down payment can help avoid the need for mortgage insurance altogether. Of course, this isn’t always possible or desirable – which is where our next tip comes in…

If You Can’t Avoid Mortgage Insurance, Get Rid of It Quickly

If you are unable to make a 20% down payment, or you simply don’t want to tie up that much cash, you can still avoid paying mortgage insurance for the life of your loan.  How?  By making extra payments towards the principal of your loan.

By doing this, you can build equity in your home more quickly, which will eventually allow you to cancel your mortgage insurance.  Check with your lender to see how soon you can cancel – it’s typically once you reach 20% equity in your home.

Do Lenders Ever Waive PMI?

Yes, but it’s rare. You would need to refinance into a conventional loan to eliminate PMI. Some lenders may do what’s called a “loan level price adjustment,” or LLPAs. This means that they raise your interest rate in exchange for waiving PMI. Loan level price adjustments are generally only available on jumbo loans.

If you do have mortgage insurance, there is some good news. The Mortgage Insurance Premium (MIP) on an FHA loan is much lower than the Private Mortgage Insurance (PMI) on a conventional loan. And, if you put down less than 20% with a conventional loan, chances are good that you will be paying PMI.

How Much Does a Mortgage Protection Plan Cost?

The cost of a mortgage protection plan varies depending on the size of your mortgage, the term of your policy, and the type of coverage you choose. For example, a 30-year $250,000 policy with level premiums would cost around $50 per month.

You may be able to find a cheaper policy if you shop around and compare quotes from different companies. Be sure to read the fine print before buying a policy, as some policies have exclusions that could leave you without coverage when you need it most.

A mortgage protection plan is an important part of protecting your family's financial future.

 

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About Jermaine Hagan (The Plantsman)

Jermaine Hagan, also known as The Plantsman is the Founder of Flik Eco. Jermaine is the perfect hybrid of personal finance expert and nemophilist. On a mission to make personal finance simple and accessible, Jermaine uses his inside knowledge to help the average Joe, Kwame or Sarah to improve their lives. Before founding Flik Eco, Jermaine managed teams across several large financial companies, including Equifax, Admiral Plc, New Wave Capital & HSBC. He has been featured in several large publications including BBC, The Guardian & The Times.

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