When you’re buying a house, you may think that you’re only going to be paying for the house itself, but then you discover something called mortgage insurance on your settlement sheet. You’re probably wondering what that charge is and why you have to pay it. By consulting a mortgage broker Kitchener homeowners may be able to get a loan that doesn’t require mortgage insurance, but if your lender requires it, here’s what it is.
Mortgage Insurance Protects the Lender
That’s right: you’re not paying mortgage insurance to protect yourself, like you do when you pay for other kinds of insurance. You’re paying mortgage insurance to protect the lender. If you are unable to pay your mortgage or you fall behind on your payments, the lender has received extra money from you to protect their investment. The lender receives a portion of what they loaned to you back from the insurance provider. Sometimes, this can be the full loan amount and other times, it’s only a portion.
Some Loans Require Mortgage Insurance for the Entire Loan
Certain types of mortgage loans will require you to pay mortgage insurance for the entire life of the loan. This is because these loans, like FHA loans, accept borrowers with lower credit ratings and lower down payment, thereby increasing the lender’s risk exposure. A FHA loan is an excellent way for new homebuyers to get their first home, but they do have the added expense of monthly mortgage insurance payments. For this reason, once you get about 20% equity in your home, it makes sense to refinance an FHA loan into a conventional loan as quickly as possible.
Some Loans Remove Mortgage Insurance at 20% Equity
Conventional loans usually require mortgage insurance if you put a down payment of less than 20% when you initially purchase your house. Lenders have determined that 20% equity is sufficient to lower their risk of lending money to a homeowner. So, if you can put down 20% at the time you take out the loan, you won’t have mortgage insurance payments at all. If you can’t afford 20% down, you can still take out a loan, but you’ll have to pay mortgage insurance until you reach the 20% equity mark. Be aware that lenders will not remove this insurance automatically. You’ll need to contact them and request it be dropped from your loan.
The Cost of Mortgage Insurance Varies
Several factors go into determining how much you’ll pay in mortgage insurance. With an FHA loan, everyone pays the same amount upfront, but then it is variable based on your loan term and amount. The upfront mortgage payment that’s due at closing is 1.75% of the total loan amount. Then, if you owe less than $625,500 and your loan term is 15 years or more, you’ll pay 0.80% of the loan amount. If you owe more than $625,500 and your loan term is 15 years or more, you’ll pay 1.00% of the loan amount. For loan terms that are less than 15 years and less than $625,500, you’ll pay 0.45% and if your loan term is less than 15 years and your amount is less than more than $625,500, you’ll pay 0.70%.
Conventional lenders charge between 6% and 35% of the loan amount in mortgage protection insurance, so it’s beneficial for you to shop around before you secure a mortgage to make sure you’re paying as little as possible. Lenders can also decide how to charge the insurance payment. For instance, some lenders may require you to pay it up front, while others may require it for a certain number of years as monthly payments. Be sure to ask how your lender is charging the insurance before you sign the papers.
Various Factors Affect the Cost of Mortgage Insurance
As you can see above, the primary factors that affect the cost of mortgage insurance are the amount of the loan and the length of the loan term. However, those are not the only factors that can impact how much you pay for insurance. Your credit score can be a major factor when getting a conventional loan, with higher scores having lower mortgage insurance rates. This is because the lender looks at a person with a high credit score as a lower risk than one with a lower credit score. If your mortgage insurance payment is based on your credit score, be sure to ask for a lower rate if you raise your score over time.
Other factors that can affect your payment amount include a loan for an investment property, a cash-out refinance, a loan for a second home, a jumbo mortgage, and whether you have an adjustable or fixed mortgage. These factors translate to higher risk for the lender and therefore, higher mortgage insurance rates for you.
Considerations for Mortgage Insurance
If paying mortgage insurance is definitely an expense you want to avoid, then you must put down at least 20% of the home’s purchase price at the time you buy it. The only other way to potentially avoid mortgage insurance is to get a loan from a private mortgage lender, who can make their own rules about mortgages and can be more flexible than traditional lenders. Otherwise, you’ll need to weigh your options. If you want to get into a home without 20% down, you’ll have to accept a mortgage insurance payment, at least until you can either refinance to a conventional loan (in the instance of an FHA loan) or get to the 20% equity mark on your loan. If you can afford 20% down, this is the best way to avoid mortgage insurance altogether.
No one likes paying mortgage insurance, but it’s a necessary evil if you want to get into a house through a traditional lender without putting 20% down. You can try to find a private mortgage lender that does not require mortgage insurance, but they are rare. However, you may be able to find one with a lower mortgage insurance rate than a traditional lender, which will benefit you as well.