We purchase insurance to make sure we’re covered in the event of an emergency. So, what are the benefits of dropping mortgage insurance? Mortgage insurance is designed to protect the mortgage lender in the event you fall behind or can’t make your payments. While on the surface it sounds like mortgage insurance is meant to protect you and your home, it doesn’t. Even worse, it can put you in a precarious financial situation.
Here’s why you should drop your mortgage insurance immediately.
How Does Mortgage Insurance Work?
First, let’s take a look at how mortgage insurance works. When you obtain mortgage insurance, your insurance will proactively pay your lender a portion of your principal in case you stop making payments.
Since there are many different types of loans, what you should expect with mortgage insurance can vary. For homebuyers who obtain a conventional loan, your lender will require you to purchase mortgage insurance if your down payment is less than 20 percent.
However, if you have a government-backed loan such as a VA or FHA loan, mortgage insurance will work very differently. VA loans don’t require a down payment, so they also don’t require mortgage insurance. However, eligible homebuyers may have to pay what’s known as a “funding fee” which can be upwards of 3.6% of your loan.
FHA loans, on the other hand, do require a down payment of as little as 3.5%. These loans typically require mortgage insurance regardless of how much money you put down. With this type of loan, the homebuyer will pay in monthly installments for the duration of the loan if they put down less than 10 percent. If they put down more than 10 percent, they will only have to pay their mortgage insurance premium for 11 years.
Now that we’ve covered that, here are four reasons you should drop your mortgage insurance:
It Increases the Cost of Your Loan
In order to get a mortgage, homebuyers first have to connect with a lender who is willing to give them a loan. There are many types of loans available; however, many of them depend on your credit score. In most cases, the lower your credit score is, the higher the interest rate will be on your loan.
However, you may be able to lower your interest rate the more money you put down as a down payment. But if you get mortgage insurance, you may be paying more money. This is because mortgage insurance is usually bundled with your monthly mortgage payments.
It Enables You to Qualify for a Loan You Normally Wouldn’t
On paper, this sounds amazing, right? However, getting approved for a loan you don’t have the financial means to repay can cause you a lot of stress. Plus, it puts you at risk of defaulting on your new home. And as mentioned above, if you default on your mortgage payments, your mortgage insurance will only protect your lender, not you.
If you get approved for a loan that you normally wouldn’t qualify for, it can put you in severe financial strain, resulting in late fees, penalties, and an interest buildup. Plus, it will inevitably damage your credit score, making it more difficult to qualify for credit cards, debt consolidation, car loans, and any other type of loan you may need in the future.
It’s Hard to Cancel
Once you sign up for mortgage insurance, it’s very challenging to get rid of it. Most mortgage lenders require a formal request to cancel your insurance coverage. Even worse, they usually insist on conducting a formal appraisal of your home before they approve your cancellation request.
There are also eligibility requirements you have to meet in order to cancel your insurance coverage. First and foremost, you must be up-to-date on all of your monthly payments in order to qualify. Second, you must wait until your loan balance reaches at least 80% of its original value. Homeowners also become eligible for cancellation once they’ve reached the midway point of their mortgage – i.e., 15 years of their 30-year mortgage.
It Won’t Benefit Your Family in the Long Run
Many homeowners choose to pass on their homes to their children once they’ve passed on. However, mortgage insurance won’t cover your beneficiaries the same way it would life insurance.
Since mortgage insurance protects the lenders – and not the ones who took out the loan – any proceeds from the house (aka your mortgage) are paid directly to the lender. This means that none of the proceeds from the house will go to your children or other beneficiaries after you pass away.
How to Avoid Mortgage Insurance
If you would prefer to avoid mortgage insurance, you’re in luck; there are several ways you can do this. The first thing you should do is look for a mortgage lender who doesn’t have a private mortgage insurance requirement.
The other option in most cases if you’re getting a conventional loan, is to pay more than the required 20 percent. While it may not be possible to avoid getting mortgage insurance depending on your situation, there’s no harm in asking your mortgage lender about your options to avoid mortgage insurance if you can.
Do You Need a Mortgage? M&M Mortgage Can Help
When it comes to finding and securing a mortgage, it’s always best to consult an expert. At M&M Mortgage, our knowledgeable team of consultants can answer any question you have about what the best type of mortgage for you is, as well as what to expect if you are required to obtain mortgage insurance. Likewise, they can advise you on the best way to get rid of mortgage insurance faster.
Whether you have questions about rates or financing, M&M Mortgage can help. Call us today at 651-639-9800 to speak to one of our licensed mortgage loan consultants.