Mortgage insurance. Just another scary, necessary part of buying a home, right?
For some, it may be necessary at first. But it doesn’t have to be scary. Aaron Lending recently published an article about mortgage insurance, which does an excellent job of explaining the different forms of mortgage insurance – MIP vs. PMI – and how you can either avoid paying it altogether or remove it after-the-fact. Below, I’m going to highlight the three best ways from the article to avoid paying mortgage insurance (MI). And then, I recommend you read Aaron Lending’s article. It goes much further in depth and also gives several helpful examples that compare the impacts of various loan choices.
The first way may seem obvious, but it’s worth mentioning because it could save you tens of thousands of dollars over the life of your loan. If you can afford to make a down payment of at least 20% of the purchase price, you can avoid paying any mortgage insurance at all. So, if you’re currently able to put down around 15%, and you’re planning on staying in your new home for a while, you may want to consider saving until you have 20%.
One of the best things about conventional loans is that you have more flexibility in eliminating its private mortgage insurance once you’ve reached certain milestones. Those milestones include your Loan to Value (LTV) ratio reaching 80% and then requesting cancellation, and your LTV ratio reaching 78% when your lender has to cancel the MI.
If you plan on owning your new home for at least 11 years, you can make a down payment of 10% or more on an FHA loan and still cancel your mortgage insurance after the 11th year. Although you probably won’t save as much money as you would have if you had put the same amount down on a Conventional loan, you’ll likely still save several thousands of dollars!
Mortgage insurance doesn’t have to be part of your life forever. Use these strategies to avoid paying more MI than you have to. And don’t forget to read Aaron Lending’s article for more tips and examples!