Mortgage insurance can be expensive, and many people try to bypass this financial burden by bringing a large down payment. However, this creates new complication and can actually increase your interest rates.
If you are making a large purchase and are concerned about interest rates, avoiding mortgage insurance may not be your best option. Fortunately, the team at San Diego Purchase Loans understands how to modify your loan so you can skip mortgage insurance without significantly increasing the interest rate on your mortgage.
And here’s how we do it…
Removing Mortgage Insurance by Providing Creative Mortgage Solutions
There is a little-known reality in mortgage lending that can surprise many borrowers. It is a fact that most mortgage banks actually require a higher interest rate for loans that do not have mortgage insurance. In other words, if you bring a 20% (or higher) down payment for your mortgage loan, you’ll skip mortgage insurance, but you could actually be paying more in interest.
There also a myth in real-estate lending: many people believe that mortgage insurance (non-FHA) is required to be a part of the mortgage payment for two years, regardless of the down payment. This is actually false. If you have a sizable down payment or, through regular mortgage payments, have reached 20% equity, you can actually have your mortgage insurance removed.
To do this, you have to make a written request for mortgage insurance termination on the date that the mortgage balance is scheduled to reach 80% equity. You can also make the request on the date when the mortgage balance has actually reached 80% of the original property value.
Removing mortgage insurance when appropriate is actually a legal requirement set by the Homeowners Protection Act of 1998. This law set many requirements that define the relationship between lenders and borrowers, and set specific parameters that include termination of borrower-paid private mortgage insurance, but only for specific mortgages. According to the law, mortgage insurance, when appropriate, must be cancelled when a borrower has reached a certain point of equity. The act covers privately-insured first mortgages on single-family residences that have been closed after July 28th, 1999.
But a problem still remains. If you don’t have a down payment, or you simply have a small down payment, you’re going to pay for mortgage insurance. If you do have a down payment and get to avoid mortgage insurance, you’re going to be forced into a higher interest rate. Either way you go, you have to pay a little more. It really is a tough situation that creates significant challenges, especially for rate-sensitive buyers who are purchasing larger homes that may require jumbo loans or similar forms of financing.
Fortunately, a knowledgable lending agent can develop a creative workaround to this complex situation.
San Diego Purchase Loans Provides a Creative Solution
Our team recently used a creative solution to help a price-sensitive borrower get the loan she needed without high interest rates or additional mortgage insurance. The strategy we used was for a first-time buyer purchasing a condo unit for $379,000 with a 20% down payment. The interest rate on the property designated as an attached condo or townhome would have had a slightly higher interest rate than a detached home. At the time of the transaction, the available interest rate for purchases with 20% down would have been roughly 4.88%, which would have meant a monthly payment of about $2,371; this would have included HOA fees, property taxes, and insurance on the property. The approximate funds required for this purchase was about $85,000.
We were, however, able to create a strategy that allowed the borrower to use her down payment funds and receive a lower interest rate. Instead of the full 20%, we used a portion of the borrower’s fund to create a 15% down payment, which meant that the mortgage, at least in the beginning, will be saddled with mortgage insurance. Using a thirty-year fixed-rate loan, we were able to push the interest rate down to roughly 4.63%. The reason the interest rate was lower is because the mortgage has borrower-paid insurance. At this rate, and with all the same fees plus added mortgage insurance, the monthly payment was about $2,474. The transaction included about $66,000 in total funds at the close.
Wait a second! The second total was higher than the first, so where is the advantage? The advantage comes when we use the borrower’s remaining funds to reach 20% equity.
Our strategy was to close the purchase at 15% down, which secured the lower interest rate. Then, after the first month, we executed a recast, which is essentially a loan modification. When we modify the loan, the additional 5% will be paid down and then the loan will re-amortize at 80% of the purchase price, which was based on the remaining months of payment (359 total months remaining). Her total payment will then fall to $2,327.75 a month, the lowest of the three monthly payments that we calculated!
You might be thinking, “$43 a month, that’s hardly moving the needle on my personal finances!” Yes, $43 might not seem like much, but when you consider those savings over the life of a 30-year loan, you’ll see that it’s nothing to ignore. Throughout the life of our client’s loan, roughly $43 a month will result in a total savings of nearly $20,000! Does that get your attention?
Here’s a couple of tables that show how our creative strategies can save you money…
Use Our Creative Team for Your Unique Mortgage Needs
Getting the most from your mortgage is what we do best! Contact our helpful team and we’ll make sure you have all the best options for the most affordable terms on a high-quality home mortgage. Getting the best terms requires experience, so visit a lender who thinks outside the box and is comfortable with complicated mortgage scenarios.
No matter what your specific situation, we can help you get the best terms on a loan that fits your exact needs!