Mortgage Insurance Explained

Certified Mortgage Advisor
NMLS 1701021
Published 
July 27, 2019

Mortgage Insurance: Is it useful?

Let's about mortgage insurance. What is it? Do you need it? How to get rid of it and then how mortgage insurance can help you a little bit and a counterintuitive way. First of all, what is mortgage insurance? The completely honest truth is that it really does nothing for you.

It doesn't benefit you in any way, but they protect the lender

It doesn't help you pay off your mortgage. It won't help you in the event of a disaster. That's what homeowner's insurance is for mortgage insurance protects the lender.

Why should we pay mortgage insurance?

So mortgage insurance is there if a loan is quote-unquote riskier. So normally this is when less money is being put down on a house. So if you put usually less than 20% down on a home, you're probably going to pay mortgage insurance, and mortgage insurance protects a lender. In the event that somebody forecloses on a house or misses payments, it helps the lender get their money back cuz they want to be paid from the loan that they gave out. So mortgage insurance helps them.

How expensive?

So mortgage insurance, I think often we can think it's a little bit more expensive. But really it's not terribly expensive. It definitely is a cost that really needs to be considered in your monthly payment and make sure that you're seeing exactly how much your mortgage insurance is.

But honestly, I've seen mortgage insurance go down to $20 a month. And the highest I've seen it so far has been around $150 a month on higher purchase price properties. So mortgage insurance doesn't have to be a terrible expense, but you definitely wanna make sure that what's going into that cost.

It will be based on your credit score

And so that brings us to how do you know what the costs are with mortgage insurance? How do those get determined? And mainly it's gonna be based on your credit score. Along with how much you're putting down. If you're putting the minimum down and you're on the lower end of the credit score range, you're going to have higher mortgage insurance because that loan is riskier to the lender. Whereas if you're putting down, let's say maybe 10% and you have a higher credit score. Your mortgage insurance is going to be lower.

Can we get rid of mortgage insurance?

Now, the way that you get rid of mortgage insurance is starting off by you're going to wanna put 20%. To not have mortgage insurance, to begin with. However, putting 20% down can be difficult sometimes, especially considering that the average purchase price in the United States is somewhere around $200,000.

So putting $20,000 or 20% down can be difficult. So that's where mortgage insurance opens up an opportunity for you to be able to put less down. Just make sure that if you're putting less down and you are paying mortgage insurance, you have a plan to get rid of that mortgage insurance eventually.

So mortgage insurance is going to drop off of your loan when you hit about 20% equity in your house. This either happens by you paying down the principal of your mortgage or your property value going up, or a mixture of the two, which is what normally happens.

Make sure you have a game plan

Know when that 20% mark is going to be hit that way a little bit earlier than that, you might be able to get an appraisal. To see if your house value went up so you can take off mortgage insurance.

Use your creativity

Then finally, I wanna talk about a creative way that you can think about mortgage insurance other than just a cost that it so often can be associated with. So sometimes when I'm looking at over kind of some financial statements that people send in. I see that they have enough for 20% down, but they also have thousands of dollars worth of debt either in student loans, credit cards, auto loans in mortgage insurance can open up a really good opportunity for you to be able to pay off some really high-interest rate debt.

So one option that you might have is let's say we have a hundred thousand dollars house, and you have $20,000 in spare cash. If you put that $20,000 on that house, you wouldn't have to pay any mortgage insurance. However, if you took that $20,000, and let's say we put 10,000 of it to pay down maybe an auto loan or a credit card debt, and you took the other $10,000 and put it on the house. You would've eliminated all of the debt that you have over here. And then the monthly cost of that mortgage insurance probably would only sit around $40 to $50 per month if you're on a conventional loan.

Mortgage Advisor can assist you

So that cost savings might make up for some of the interest cost over here. And then you can eliminate some of this consumer debt. So it's one strategy, definitely something to explore with a mortgage advisor. But mortgage insurance, in a nutshell, it's there to protect the lender. It really does not serve you at all, other than it possibly being an opportunity cost. If you're wanting to put some more or put some less money down.

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