Mortgage insurance is a policy held by the lender to protect the bank from the risk of default by the borrower. It covers the lender from the possibility that the mortgage may have to be repossessed and thus lose value.
Did you know you could remove traditional mortgage insurance using an Adjustable Rate Mortgage? That’s right! This post will show you how you can eliminate mortgage insurance using an ARM. As a mortgage broker, I’m often asked how to remove conventional mortgage insurance from my clients’ loans. But I always recommend they get a free consultation from a loan officer who is experienced in arms.
Most people know they must pay a mortgage insurance premium (MIP) to get a conventional mortgage. Many also know that mortgage lenders don’t require mortgage insurance on FHA loans. For many, however, mortgage insurance is needed simply because it’s what “everyone does.” If you buy a home and get a mortgage without it, you risk being labeled a “risky borrower.” If this is you, you may have been convinced to buy an insurance product that isn’t necessary or beneficial to you or your lender.
What is conventional mortgage insurance?
Conventional mortgage insurance protects lenders from risk when you take out a mortgage. Traditional mortgage insurance is usually sold in addition to a standard mortgage.
This is different from private mortgage insurance, which is sold separately.
Conventional mortgage insurance is a required part of most conventional loans. Generally, it covers the difference between the loan amount and the amount you borrow. That means if you get a loan for $200,000 and only put down $150,000, you’ll have to pay an additional $50,000.
The Truth about conventional mortgage insurance
If you’ve been reading this blog for a while, you’ve probably noticed I talk about mortgages a lot. This is because I am a big fan of the Mortgage Industry.
As you may know, I own a mortgage brokerage firm called Mortgage Brokerage Firm, Inc. We’re a full-service mortgage brokerage firm that provides home loans to borrowers across the United States. If you’re new to the mortgage industry, you might wonder why I’m so passionate about it. It’s quite simple.
I love the mortgage industry because I’ve seen the struggles of people who can’t get a loan. There are a lot of myths about conventional mortgages and how they work. So let’s break down what conventional mortgages are, what they are not, and what you should know about them.
What is conventional mortgage insurance?
Mortgage insurance is a monthly cost paid to protect the lender if you default on your mortgage. It’s usually required for borrowers who have a down payment below 20% and want to borrow up to 80% of their home’s value. Conventional mortgage insurance is usually removed by making a “private offer” lower than the borrower would otherwise qualify for.
But how do you go about removing it? Let’s dive into that.
How can I get rid of conventional mortgage insurance?
A conventional mortgage is a mortgage where the interest rate and term (the length of time the loan is outstanding) are fixed. Traditional mortgage insurance (PMI) is a required component of most conventional mortgages. While traditional mortgages come with various loan options, there is only one option that doesn’t require PMI – an adjustable-rate mortgage (ARM).
How to lower your mortgage insurance
So you’ve saved a few hundred dollars by avoiding conventional mortgage insurance? Not bad! You can lower your monthly mortgage insurance payment further using an ARM. While you don’t need to pay any mortgage insurance on an ARM, you will still be required to maintain a certain amount of equity.
Here’s a simple way to find out how much equity you’ll need to keep your mortgage insurance down to zero: Add up your current loan balance and multiply that number by the interest rate you’re paying on loan.
Let’s say you have a $200,000 loan with a 5% interest rate and pay $1,000 monthly in mortgage insurance. Multiply that number by 0.05 to get the mortgage insurance rate, which is 0.005. Then, add that number to your loan balance, and you’ll see the equity you need to keep your insurance to zero.
Frequently Asked Questions Mortgage Insurance
Q: How does mortgage insurance work?
A: When you refinance your home, the bank can offer you an interest rate lower than your existing mortgage. This new lower rate usually requires that you pay mortgage insurance.
Q: Is this additional amount of money taken out of your pocket?
A: Yes, it is. Most mortgages require paying insurance when you take out a new loan. Some lenders do not charge mortgage insurance, but those are generally the higher-priced loans.
Q: How much extra do I need to pay for mortgage insurance?
A: The lender will calculate how much you have paid in mortgage insurance. Once you’ve paid the required amount, you no longer have to pay mortgage insurance.
Q: Does it cost me anything to have conventional mortgage insurance on my home?
A: No. You pay one month’s interest on the mortgage insurance on your home. The lender does not charge you this month’s payment.
Q: What are some ways I can save money on mortgage insurance?
A: You can refinance your mortgage if it has conventional mortgage insurance. It can be cheaper to pay the insurance than the interest rate.
Top 3 Myths About Mortgage Insurance
1. The lender requires conventional mortgage insurance.
2. Conventional mortgage insurance will only reduce your monthly payment.
3. Conventional mortgage insurance will increase the overall cost of the loan.
Conclusion
The key to removing conventional mortgage insurance is to get pre-approval for a loan that does not require it. If you have a down payment of 20 percent or more, you can expect pre-approval for a 30-year fixed-rate mortgage without mortgage insurance. For most people, however, this option will not be available. In most cases, you will need to go through the process of getting pre-approved for a conventional mortgage and then waiting for the lender to accept your application. You can refinance your mortgage so that you get the lowest possible rate. You might also consider putting down less than 20 percent.
