Do a quick google search of “how do I get rid of my Mortgage Insurance” and most of the results will say something along the lines of – ‘once you have 20% equity, you can apply to get rid of it.’ Which is true on a conventional loan. But there are other ways to get out of monthly mortgage insurance.
Before we begin, I think we should take a step back to level set us all on what we are talking about. This article is about mortgage insurance on a conventional loan. Also called private mortgage insurance or PMI.
PMI is insurance the mortgagor (the bank or other entity you are getting your mortgage from) charges you as a buyer for the risk associated with your file. In the world of mortgage insurance, the first gauge on riskiness of the loan is the amount of downpayment. If you are getting a conventional loan and putting down more than 20%, you do not have mortgage insurance. If however, you are putting down less than 20%, mortgage insurance comes into play.
Once the lender has established that mortgage insurance is required on your loan. The next question they seek to answer is how much do we charge for it. There are several buckets of possibility for paying mortgage insurance. The most common are:
- Monthly Rates – a dollar amount charged monthly to the borrower
- Single Pay – one lump sum payment made at closing
- Split Premium – a hybrid of monthly and single pay
In my experience, the overwhelming majority of loans that require mortgage insurance are structured with the monthly rate option. If you are required to have mortgage insurance on your loan, you will pay it monthly until you have 20% equity into the home. However, for those that are extremely payment sensitive, there are other ways to meet the PMI requirement, without having to see it every month.
Single pay is perhaps the best thing going. Single pay allows you to pay a flat amount at closing to cover PMI for the life of the loan. On a $300,000 loan, the full PMI I’ve seen lately is around $9,000. The exact amount will depend on your credit score, loan to value and other pieces of the file. To be clear, this increases your closing costs. However, in the part of the DC market I operate in, seller concessions are common. So one savvy way to not pay PMI is to structure it so you pay it totally at closing, and use all or a portion of the seller help to cover the cost.
There are several other twists and turns to mortgage insurance, and if you are interested in this or other savvy strategies for home financing, please feel free to call at any time!