Avoiding FHA mortgage insurance can be tough, but it’s not impossible.
When you apply for your first mortgage loan, you might be surprised to see all the additional fees and expenses. Suddenly the number you expected, the one you got from a random online mortgage calculator, is far less than the number being quoted by the lending agent.
One of the costs that drive up monthly payments is mortgage insurance.
The FHA, for example, tacks on mortgage insurance as a way of protecting their investments against default. Avoiding FHA mortgage insurance is possible, but it starts with having a clear understanding of the reasons and the advantages (to both you and the lender) of this additional cost.
Understanding Mortgage Insurance
Mortgage insurance is a tool used by lenders to protect their investment against loan default. Essentially, you (the borrower) make payments to the lender, and the lender in turn pays an insurance company that provides financial protection if the loan goes into default.
It sounds bad, but mortgage insurance is beneficial to borrowers because it opens new mortgage opportunities that might not be available otherwise. If the insurance did not exist, many loans would simply be unavailable.
Mortgage insurance payments can come as a one-time fee and a monthly premium, which is added onto your loan. The costs is usually about 0.8% of the loan, which sounds small but can represent hundreds of dollars a month. If you borrowed $400,000 or more, the insurance can easily add $400 or more to your loan payment. At this price, you can see why many people try to avoid paying mortgage insurance whenever possible.
Avoiding FHA Mortgage Insurance
So how can all of this be avoided? How can you keep from paying mortgage insurance on an FHA loan while still having a high-quality home? Here are a few steps you might consider…
Bring a Large Initial Down Payment
If you have not yet received a mortgage loan, one of the best ways to avoid paying FHA mortgage insurance is to bring as large a downpayment as possible. Currently, if you secure an FHA loan with less than 10% down, you will have to pay mortgage insurance for the life of the loan. While many people find it beneficial to have low down payments, as it allows them to enter into homeownership with a lower initial cost, taking your time and saving for a large down payment is a great strategy for completely avoiding FHA mortgage insurance, as well as insurance attached to other loan products.
If you are able to save enough money, you can actually avoid mortgage insurance completely by saving 22% (for some lenders it’s as low as 20%) and going with a conventional loan that does not have private mortgage insurance. Obviously this is an ideal scenario, but it can be hard to save this much cash.
Contact the Lender to Verify Your Numbers
You may not realize it, but your FHA loan could be eligible for having the mortgage insurance removed. If you received the loan between December 31st, 2000 and July 3rd, 2013, and your loan-to-value is currently 78% or less, you are likely eligible to have the FHA mortgage insurance completely removed. However, if you received the FHA loan after July 3rd, 2013 and put less than 10% down, you will have to pay the insurance for as long as you have the loan. Simply put, it never hurts to look at your mortgage just to see if the insurance should be removed.
Refinance the Loan
For some homeowners, refinancing the loan may be a good option, as you can reap certain benefits, including dropping the mortgage insurance. When you refinance, you’ll have the option of doing an FHA streamline refinance or a conventional refinance; depending on your situation one or the other may be more beneficial, but both will give you the option of avoiding FHA mortgage insurance.
Piggy Back Loan
If you can’t save for a down payment, you could actually borrow the amount using what is known as a “piggy back loan.” With a piggy back loan, you essentially get a second mortgage that covers the 20% amount (or whatever is required to avoid mortgage insurance). This helps you get the financing you need to avoid mortgage insurance, but in many cases you will need to bring at least 5% of the property value from your own cash.
If you are a veteran of the United States Armed Forces or a qualifying family member, you may be eligible for a VA loan, which is the only loan option that allows you to get a loan with 0% down and no mortgage insurance. This can be an exceptional benefit for qualifying individuals, and could help you acquire the affordable mortgage loan you need without having to save for a significant down payment.
To be honest, this is not a tip for avoiding mortgage insurance, but rather reducing mortgage insurance. If you live in or plan to move to a rural or qualifying suburban area, you may be able to get a loan backed by the USDA. These loans usually have lower mortgage insurance premiums than FHA loans, and can help you save as much as $100 a month on a comparable loan.
Make Extra Payments to Reduce Loan-to-Value
If your loan is eligible to have the mortgage insurance removed at some point, it may be beneficial to simply make extra payments towards the loan, which will reduce the amount of time that you are paying the premiums. Depending on your loan and how close you are to the magic number, increasing your payments by as little as $100 a month could help end the premiums a lot sooner.
Before doing anything, take a look at your loan and spend some time crunching the numbers to see if simply paying more towards the loan would be better than trying to refinance.
Get the Right Advice for Your Mortgage Decisions
If you have any questions about avoiding FHA mortgage insurance, contact San Diego Purchase Loans today. We’ll help you understand the benefits of the various loan options so you can choose the best path for your financial future.