One thing that will definitely raise your mortgage payments each month is having to add the cost of mortgage insurance. Not everyone with a mortgage has to pay this additional cost, though, and there are some ways it might be possible to get out of it.
Mortgage insurance, typically referred to as private mortgage insurance, or PMI, or lenders mortgage insurance, is added to a mortgage to ensure that the lenders will be repaid. There are several different kinds, but PMI is the most common. It will usually be required on a mortgage when the home buyer is not able to put down 20 percent of the mortgage. Lenders prefer borrowers that they know are good with money management, and they believe that being able to save 20 percent of a home’s value proves that you are a good credit risk.
What Affects Mortgage Insurance Rates
Even when two homes have similar value, the cost of PMI for two buyers may vary considerably. According to RealEstate.com, factors that affect your cost of mortgage insurance will be affected by the size of the premium, the size of your down payment, and your credit score. Having a good credit score will give you lower costs on your PMI.
The Amount of Your PMI
When you pay less than the standard 20 percent of a downpayment, mortgage insurance will be necessary. BankRate.com says that this amount will usually be between 0.5 and 1.0 percent of your home loan. They also say that PMI is usually paid on a monthly basis, but sometimes a lender will require it in full at closing. As an example, for a home that costs $200,000, this would amount to an additional $166.66 per month, or $1,999.92 per year.
Options to Get Out of Mortgage Insurance
One common way to get out of paying mortgage insurance is to get combination financing, which is also called a piggyback loan. This is done by getting two mortgages. The first one is for 80 percent, which will enable you to avoid the PMI, says FinWeb.com. The second mortgage would typically be for another 10 percent. Another way to avoid PMI is to get an FHA or a VA loan.
Mortgage Insurance is Deductible – Sometimes
For many people, they can deduct the cost of mortgage insurance. However, Investopedia.com says that this is only true if the combined income of a married couple is less than $110,000 per year. If they file separately, then the maximum is $55,000 each.
It May Be Difficult to Stop Paying Mortgage Insurance
Mortgage insurance may sometimes be difficult to get stopped, once you have been paying it for a while. It will often stop automatically once you have paid 20 percent of the value of the house. This may require an evaluation – in case it increased in value. The Homeowner’s Protection Act, says Realtor.com, says that lenders are legally required to stop PMI coverage once your mortgage reaches 78 percent of the home’s value. Making extra payments will also help you reach that amount faster.
Although many people do pay mortgage insurance, you are better off if you can avoid it. Buying a slightly smaller house may help you reach your goal, or saving your money a little longer.