- Lenders pay for mortgage insurance, which protects borrowers from mistakes.
- Home mortgage lenders must take out insurance when the borrower has 22% equity in the home.
- Homeowners can take advantage of these discount options soon.
If you buy a home with a mortgage and pay less than 20% down, you may face additional home insurance costs. Depending on how much you borrow and your credit score, it can have a big impact on your monthly payments.
This additional cost protects the lender, not you. The amount of time you have to pay for mortgage insurance will vary depending on the type of loan and the amount paid. Either way, there are steps you can take to get rid of your home insurance sooner.
What is mortgage insurance?
Homeowners insurance comes into play when homebuyers put less than 20% down on a home. Although lenders are willing to repay the loan with a lower payment, they see lower repayments as a risk. And with that risk comes home insurance, paid for by the borrower.
Mortgage insurance protects the lender if you default on your loan. This is different from homeowner’s insurance, which is also required when you have a mortgage and protects you and your home from damage. For example, homeowner’s insurance may cover a bill to help you repair your roof after a storm.
When you put down a down payment, you’ll need to pay mortgage insurance – or face higher interest rates – if you put down less than 20%.
Home insurance for regular mortgage loans
If you use a home equity loan to buy your home, most lenders require you to pay private mortgage insurance (PMI) if you put less than 20% down. In some cases, they may choose to waive the offer in exchange for a higher interest rate. However, in such cases your total loan amount may be higher than it would be with PMI.
There are two types of PMI.
The most common is the borrower-paid. When you close the loan, the lender will let you know the monthly cost. In most cases, you can pay this amount back to your mortgage. But you may have the option of paying separately every month. With lender-paid PMI, the lender must stop the payment when you build 22% down on your home or reach the middle of your repayment schedule.
The second type of PMI is mortgage payments. The lender pays the cost of the insurance, but charges you a higher interest rate to make the payments. Unlike lender-paid PMI, which can be waived, the higher interest rate associated with mortgage loan insurance stays with you for the life of the loan.
Home insurance for FHA loans
An FHA loan is a federally subsidized home loan guaranteed by the Federal Housing Administration. The insurance you pay on this loan is called the mortgage insurance premium (MIP).
As an FHA lender, you will pay 1.75% of your total loan amount at closing. After that, you’ll pay annual fees ranging from 0.45% to 1.05%, usually for the life of the home.
How much does home insurance cost?
Home insurance premiums can add up quickly.
According to data from Urban Institute, PMI can range from 0.58% to 1.86% of your loan amount. Although the monthly cost will vary, Freddie Mac estimates that you pay between $30 and $70 per month in PMI for every $100,000 borrowed. That’s $360 to $840 a year on a $100,000 loan.
5 ways to get rid of home insurance fast
Fortunately, it is possible to pay off mortgage payments quickly. Here are some ways to reduce these costs.
1. Ask your lender to foreclose
Homeowners typically have the power to demand homeowner’s insurance. But they also have the power to waive these costs. Sometimes, it’s as simple as calling the lender.
“The first step is to contact the lender and ask if you can cancel your home insurance,” says Michael Ryan, financial advisor at Michael Ryan Money.
The best time to call is when you build 20% equity in your home. However, lenders do not have to honor your request for 20%. If they deny your request, foreclosure is still imminent because they have to cancel your home insurance if you put 22% on your home.
Paying off your home loan can give you a quick way to get out of this expensive debt. But you need to have at least 20% equity in your home and choose an investment strategy that doesn’t involve cash outflows. This option can help you get rid of home insurance on a conventional or FHA loan.
“Remember that you don’t have to refinance with your current lender,” says Paul Sundin, an accountant and CEO of the company. Empathy, a provider of retirement health care. “You can work with other lenders. Once you apply for a loan, wait until the review and underwriting are complete.”
3. Review your home
If your home has gone up in value, this can help you hit the 20% equity mark.
Andrew Latham, CFP® expert and CFP® product director comments: SuperMoney.
“When your credit score reaches 80%, contact your lender and ask about their PMI policy,” says Latham. In some cases, the lender may send an appraiser to assess the value of your property.
Before the appraiser shows up, “go through the house with a critical eye and make sure everything is going well,” Latham advises. If anything else could seriously affect your home’s value, make any repairs you can before starting a new appraisal, he says.
4. Think about home improvement
Many factors contribute to the value of your home. Of course, the movements of the common market are beyond your control. But supervised home renovations can also increase the value of your home.
Latham recommends focusing on renovations that offer the best return on investment, such as remodeling bathrooms and kitchens. They also say that most lenders require a checklist. So, keep detailed notes on the way. If projects increase your home equity to 20%, approach your lender about canceling PMI.
You can also speed up your PMI write-off by making additional payments that bring you up to 20% in advance. If you have room in your budget, putting more money into your mortgage loan can get you to the bottom line faster.
If you don’t have room in your monthly budget, consider adding extras that come to your credit line.
Ryan McCarty, CFP® professional and CFP® owner says: McCarthy Money Matters. Another payment method he suggests is “if you pay off another loan, use those dollars to increase your loan payments until the PMI is cleared.”
A very important point
“Mortgage insurance is the bleeding edge,” says McCarty. While the availability of mortgage insurance means you can move into your home without putting down a 20% down payment, the extra cost is a drain on your budget.
As a borrower, there are ways to pay off your home insurance premiums early. If the strategy works for your situation, go ahead with confidence to put more space in your budget.