Mortgage Insurance: How it Helps, How it Hurts, How You Can Avoid it

We know. You’re already paying a ton for your Florida home loan, so the idea of paying even more for mortgage insurance for the first few years probably sounds as appealing as the stomach flu.

Fortunately, over the years, ways of avoiding these payments have emerged — even if you can’t pull together the 20 percent down payment.

Here, we’ll take an in-depth look at mortgage insurance and help you determine if you need it.

Essentially, mortgage insurance is an insurance policy that home buyers are required (in most cases) to purchase if their down payment is low. If you can’t pony up 20 percent or more of the property’s sale price or appraised value, your lender will require this protection, lest you default on your Florida mortgage loan.

But here’s the upside. Commonly (and mistakenly) referred to as private mortgage insurance (PMI), which is one of the product’s largest providers, millions of people have been able to purchase homes.

With higher prices than ever after a five-year housing bubble, people are coming to the table with smaller and smaller down payments, and this insurance allows more potential home buyers to purchase homes, and sooner, with as little as a 5 percent down. Also, it can help an individual qualify for a variety of Florida mortgages.

The cost of mortgage insurance varies according to the down payment and Florida mortgage loan, but it typically equals approximately one half of one percent of the total amount of the loan. Here’s how it’s calculated:

• Assuming you purchased a home for $200,000 (good luck with that in South Florida), and have $20,000 for your down payment.
• Your lender will multiply the remaining 90 percent by .005 percent, or half of 1 percent. The result, $900, is your mortgage insurance premium, which is divided into monthly payments.

After a few years of Florida home mortgage payments, you should be in position to stop making payments on the premium. Keep track of payments and contact your lender when you reach 80 percent equity, so that the policy can be aborted.

The Homeowners Protection Act of 1999 requires banks and/or mortgage lenders to notify you how many months/years it will take to pay off 20 percent of your home loan’s principal. It’s good to keep track of it on your own, too.

One strategy commonly employed is to pay a higher interest rate on your mortgage. Some lenders will waive the mortgage insurance requirement if home buyers agree to pay a higher mortgage rates. One advantage to this strategy is that mortgage interest is tax deductible, whereas the insurance premium is not.

Another way to avoid paying PMI is by using the “80-10-10” loan strategy.

This strategy involves taking on two loans and putting down a 10 percent down payment to purchase a home. One home loan finances 80 percent of the mortgage, while the second loan finances the remaining 10 percent of the sales price.

Subsequently, the second mortgage — the one that covers the remaining 10 percent — has a higher interest rate. But since the amount of that loan is low, the interest charges are almost negligible, and (relatively at least) easy to pay off.

Fortunately, you may also be able to leverage your equity into evading this insurance earlier than expected. It’s possible to cancel your mortgage insurance if you can prove that your home has increased significantly in value. If the value of your home has increased, you may already have 20 percent (or even more) of the equity you need to cancel the policy. You can submit evidence of this to your Florida mortgage loan provider, but the process may slow.