Thursday, November 1, 2012

When Does Mortgage Insurance Go Away?


What is mortgage insurance?  When do you have to get it?  When does it go away?

Here's what you need to know:

Mortgage insurance is an insurance policy that you must have if you get a mortgage for more than 80% of the value of your property.  You, as the borrower, pay for it, and the lender gets paid if you go into foreclosure.  You do not get any money from the mortgage insurance policy - only the lender gets paid.

The value to you is that it allows you to buy a house with less than 20% down.  You only need 3% down with a conventional loan and 3.5% down with an FHA loan - as long as you have a mortgage insurance policy.

Mortgage insurance automatically goes away when you have 22% equity in your house, based on the original purchase price.  As an example, if you paid $200,000 for your house, then the mortgage insurance would go away automatically when you pay down your mortgage to $156,000.

If you have a conventional loan (a non-government loan) and you can get an appraisal showing that you have 20% equity in your house, then you can ask the lender to drop the mortgage insurance early.  Instead of needing 22% equity, you might be able to get rid of the mortgage insurance when you have only 20% equity.

If you have an FHA loan, then you cannot get rid of the mortgage insurance early by proving you have 20% equity.  You must wait until you have 22% equity.  Also, with FHA loans, you must pay for mortgage insurance for a minimum of 5 years, regardless of the size of  your down payment.  This is why it makes no sense to get an FHA loan if you have 20% down. 

If you have very good credit, it is possible to get two loans when you buy a house.  The first loan would be for 80% of the sales price, and the second loan would be for 10% of the sales price.  You would need 10% down if you did things this way.  Because neither of the loans would be more than 80% of the sales price, you would not have to pay for mortgage insurance.

Some lenders will tell you that they will sell you a loan without mortgage insurance, but they are not really telling you the truth (imagine that!).  What they are doing is charging you a higher interest rate, and then using the extra profit they are making to buy mortgage insurance.  It is called lender-paid mortgage insurance and is rarely a good deal because you end up paying a higher interest rate for the next 30 years.  That costs you thousands of dollars more than getting a mortgage insurance policy that goes away when you have 22% equity.  Watch out for lenders who try to sell you loans like this.  They are deceiving you if they don't explain that you are paying a higher interest rate forever.

By the way, if you get a VA loan (only for veterans, members of the active military, National Guard, or Reserves), you do not have to pay any mortgage insurance, even if you have no money down.  That is a benefit of serving the country, so if you qualify for a VA loan, you really should get one.

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