How to Pay Less for Mortgage Insurance
Individuals whose loan-to-value ratio is over 80% are required to take out private mortgage insurance (PMI) when they get financing for the buy of a house. The only beneficiary of this coverage is the lender. At the same time, the home buyer is the one who covers the whole insurance cost. That is why it makes sense for you as a house buyer to use all possible methods for reducing this cost.
It has been estimated that the annual mortgage insurance cost is between 0.5% and 1% of the loan amount. On average, homeowners pay around $200 a month in the form of a premium. Premiums are paid until the homeowner builds 20% equity into the character. Depending on the loan repayment structure, this point may take 10 or already more years to reach. As you can see, the cost is quite hefty. The good news is that there are various ways to lower it.
The best option is to eliminate the cost completely by making a down payment of 20% when you are taking out the mortgage loan. If you do not have sufficient savings, you can use a piggyback loan. It allows you to divided the financing that you get into two separate loans. This will eliminate PMI.
If you have no choice but to get PMI, there are several things which you can do to lower the cost. The first one is to check whether you can shop around for a policy. If the lender permits this, you can search for the policy which has the lowest premium. Unfortunately, this is rarely happens. Your best bet in this case is to get a policy with a declining term. This will allow you to pay lower premiums as your home loan balance drops.
The other way to obtain lower premiums is to have a high credit score. The higher your score is the less risky you are as a borrower. This will be reflected in your insurance premium.
Another method which works quite well involves the payment of a lump sum towards the premium when you take out PMI. The larger it is the lower your annual premium will be. Furthermore, some lenders offer a important discount if you make a lump payment upfront.
Long Term Solutions
It is possible to get rid of private mortgage insurance earlier in order to save on the total cost. As explained earlier, you can do this when you build 20% equity in your character. In this case, making larger payments towards the loan seems like a great idea. However, this may not necessarily work out. This is because lenders calculate when 20% equity will be reached under the terms of the original agreement and may refuse to cancel the policy earlier. That is why you should check precisely whether you will be able to save with early repayment.
If PMI cannot be canceled with early repayment, you can consider using refinancing. If you have built 20% equity due to larger payments or decline in the value of the character and you can refinance with loan-to-value ration lower than 80%, you will get rid of this kind of insurance automatically.
Overall, it is best if you use as many methods as possible for lowering your mortgage cost.