There’s no way to escape risk when you’re speaking about real estate. With great risk comes great reward, but also some financial consequences. So long as you’re being smart about it you’re prepared for what’s to come, you should be fine. But, no one wants to pay yet another bill every month. Still, if your down payment on your real estate investment is going to be less than 20%, you will be into paying mortgage insurance policy in addition to your mortgage, closing costs, amongst other ancillary expenses when it comes to buying a house. Someone has likely explained this to you as just another expense to expect that will disappear without getting into much detail and expecting you to accept that. That’s not how we’re going to do this.
So, what is mortgage insurance? To put it simply, putting down less than 20% as a down payment makes you a higher risk lender, regardless of credit history. Your bank, or whatever lender is financing your mortgage, is taking a risk by giving you this sizable loan and they require an insurance policy for the possibility of you not being able to pay back your mortgage loan. You’re not the only party taking a risk, here. If mortgage lenders are taking a risk by giving you a loan, they also need to be protected and you will be responsible for paying into a policy to guarantee a certain level of protection.
They break down into one of two policies: a PMIs (Private Mortgage Insurance), which are mortgage insurance policies on traditional loans or MIPs (Mortgage Insurance Premium) which is required on all FHA mortgage loans regardless of your down payment. Since not all policies are created equally, they have respective ways of getting rid of this additional expense.
There’s no loophole to get around paying your mortgage insurance. The only way to go about getting rid of this is making regular payments on your principal and reaching 20% vested equity in your home. At that point, if you have a PMI plan, you can go ahead and cancel your insurance policy and potentially look into refinancing your house to get your mortgage payment adjusted.
However, when it comes to a MIP plan the FHA is requiring this mortgage insurance regardless of your initial down payment, so it would seem that you’re stuck with this expense forever. That’s incorrect. Here’s where you can get creative. Once you’ve paid 20% of your home’s value on your mortgage with the FHA, you can refinance with a traditional mortgage loan. If you’ll remember back, traditional mortgages don’t require mortgage insurance once you’ve achieved 20% of your home’s total equity.
This is also a great opportunity to get back in touch with your broker. Not everyone needs to become best friends with their mortgage lender, but this is a key reminder that this business relationship does not conclude once you close on your house. They’re going to be valuable resources when the value of your home changes, thus impacting the necessity of your mortgage insurance policy. The increased value of your home is also something that can trigger the dissolution of your mortgage insurance policy. Since those values are subjective, it’s good to engage with a reliable barometer who has their eye on the market and since you’ve already established so much trust with your broker, they’re a wonderful resource. When it comes to risk, this is a low impact way to go about getting rid of your mortgage insurance.
Having respect for the risk involved with home buying is a two way street involving a lot of money from all parties involved. However, the greatest benefit to ownership versus renting is that this is all part of the larger picture: this home is an investment that you’re making, a safe place to put your money, and a smart decision that will – hopefully – result in financial growth not loss. Like they say, no risk no reward. So, appreciate your mortgage insurance for what it is and then once it’s served its purpose, get rid of it so you can focus on contributing to the equity of your home.