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How to Avoid Mortgage Insurance

How to Avoid Mortgage Insurance

The only absolute answer for how to avoid mortgage insurance is to put 20% down.  But there are some tricks to at least reduce the premiums.  You can shop for mortgage insurance, you can compare quotes, and you can control the rate your are charged.  All accomplished by how you structure your mortgage.

Now, If you do not put at least 20% down on a real estate mortgage, you will pay some form of mortgage insurance.  Mortgage insurance is insurance you buy for your lender so they will accept less than a 20% down payment.  They are two types of mortgage insurance: up front, which is paid at closing; and the annual premium, which is paid in monthly installments and included into your mortgage payment.

But, you can reduce your mortgage insurance, far below what most people pay.

OK, back to the two types of mortgage insurance:

Up Front Mortgage Insurance

Paid to the mortgage insurer “up front”, or at closing.  The funds for this payment are paid by the lender for all non conventional loans, and become “rolled” into the loan.

Conventional loans do not require Upfront mortgage insurance.  A borrower can choose to pay their annual mortgage insurance in a single premium “up front”, but it cannot be rolled into the loan.

Annual Mortgage Insurance

Quoted as a percentage – to translate it into a dollar amount, multiply your loan amount by the percentage quoted and you will have your annual mortgage insurance premium.  Divide this by 12 and you will have the monthly premium that is added to  your mortgage payment.

You may be required to just pay for it up front, or you may be required to pay both upfront and monthly – it all depends on how your mortgage is structured.  But knowing how the program works and where the options become available is your key to the ultimate question:

What is the fastest and least expensive way to get a loan?

So, let’s get there.  The thing to do next is to look at the mortgage insurance program for each loan type.  Within those programs are the opportunities to reduce mortgage insurance.

Conventional Mortgage Insurance

To give you an exact quote on your mortgage insurance premium for a conventional mortgage I would need your credit score, your loan to value, and your debt to income ratio.  They are banded, and an A+ credit borrower will pay less than an A-rated borrower, and so on.

But here is the kicker.  The difference in an A+ borrower and an A-rated borrower is 1 credit score point.  What if I could improve your credit score by 1 point, let’s say by paying your debt down a few hundred dollars, and it would save you for the life of your mortgage, wouldn’t you want to do it?

That is one of 100 reasons why you want to pre-qualify your mortgage application as soon as possible.  If you need a week or two to save thousands of dollars, you should take it.  Find out your credit score and start getting pre-qualified by clicking here.  Or call me at 918-949-7248.

The next step would be a free analysis report.  How much would you save if you paid all of the mortgage insurance in a single premium?  Would it be better to put 15% down or to put 5% down and use the remaining cash to pay down the mortgage insurance?  What could the tax benefits be?  To initiate your fee mortgage analysis, customized for your personal situation, click for an application here.  Or call me at 918-949-7248.

FHA Mortgage Insurance

  • Upfront Fee of 1.75%
  • Annual/Monthly Fee of 1.35%
  • You pay both.  It never drops off unless you put 10% down at time of purchase, and even then it is required for 11 years.

You can save 5 basis points on your mortgage insurance if you put 10% down, but I don’t know that this is a good use of cash.

Another way to avoid mortgage insurance in an FHA loan program is to amortize over 15 years.  The 15 year mortgage insurance rate is .45% with 10% down and .70% with less than 10% down.

The best way to avoid mortgage insurance in an FHA loan is with the HAWK program.

FHA has recently published a federal register notice announcing a new counseling program.  It’s called The HAWK (Homeowners Armed With Knowledge) Program (click here to read the HUD report), and the program is counseling for first time home buyers.

Benefits of the HAWK program are:

  • upfront fee of 1.25% (a reduction of 50 basis points)
  • Annual/Monthly Premium of 1.25% (a reduction of 10 basis points)
  • After 2 year’s history of timely payments – a reduction to 1.1%

I know the drag is going to be that class, and the whole “counseling” concept, but the program is intended to teach quality budgeting techniques; and financial literacy is a continued education.  Program Counseling must be completed 10 days prior to contracting in order to avoid mortgage insurance by reducing premiums.

Section 184 – aka The Indian Loan

  • Funding fee of 1.5%
  • Annual/Monthly Fee of 0%

For a loan program that requires a down payment of 2.25% and no monthly mortgage insurance, paying an 1.5% funding fee is a bargain.

VA Loans – 100% Financing

  • Funding Fee of 2.15% for first time use
  • Funding Fee of 3.3% for next use
  • Can be waived if borrower has a service related disability
  • Annual/Monthly Fee of 0%

If you increase your down payment to 5%, your Funding Fee goes down to 1.5%, and if you put 10% down it reduces to 1.25%.  These rules apply for first, second or third time use.

Funding fees for National Guard/Reserves are .25% higher across the board.

USDA Rural Development Guaranty 100% Loan Program

  • Upfront Fee of 2%
  • Annual/Monthly fee of .4%

For a 100% loan at 640 credit score, this is inexpensive mortgage insurance.

Copyright 2014 John Regur All Rights Reserved – Originally Posted at: Tulsa Oklahoma Mortgages – John Regur

Posted in: For Buyers

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