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How Long do you Have to Pay Mortgage Insurance?

September 6, 2018 By JMcHood

If you put less than 20% down on a home, you’ll likely pay mortgage insurance. This insurance protects the lender should you stop making payments on your loan. The insurance will pay the lender back a portion of the amount they lost by repossessing your home.

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Just how long do you have to pay this insurance? It depends on the type of mortgage you have.

Conventional Loans and Mortgage Insurance

If you took out a conventional loan, such as a Fannie Mae loan, you pay what’s called Private Mortgage Insurance. Lenders require you to pay this insurance if you make a down payment of less than 20%. By law, this insurance must be canceled by the lender once you owe less than 78% of the home’s original value, though.

There’s even better news, though. You can request cancelation of the insurance as soon as you owe 80% or less of the home’s current value. This may happen sooner than your original mortgage documents show, but it’s up to you to prove that you do owe less than 80% of the home’s value.

If you follow the original amortization schedule, you will know the exact month that you will be able to request that the lender cancel your PMI. You must request the cancelation in writing. If you know your home appreciated, though, you may request cancelation sooner. Here’s how.

First, you must order a professional appraisal. While you can likely get an estimated value of your home on sites like Zillow and Redfin, the lender needs solid proof that the home is worth what you say. With a professional appraisal report in hand, you can determine if you owe less than 80% of the home’s new value by dividing the home’s value by the outstanding principal balance on your loan. If it’s less than 80%, you can request cancelation.

Keep in mind, though, that this is up to lender discretion. Some lenders allow you to cancel PMI early if you can prove your home appreciated, while others don’t allow this method. If that’s the case, you must wait until the anticipated date that you will hit an 80% LTV to cancel the insurance.

FHA and USDA Loans and Mortgage Insurance

If you take out a government-backed loan, such as an FHA loan or USDA loan, you’ll also pay mortgage insurance. In fact, you’ll pay mortgage insurance twice with these loans. The first time is at the onset of the loan. You can either pay the insurance upfront at the closing or wrap it into your loan amount.

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You’ll then also pay annual mortgage insurance, which is similar to the conventional loan’s PMI. Unlike conventional loans, though, with government-backed loans, you can’t request cancellation of the mortgage insurance. You pay the premiums for as long as you have the loan.

Luckily, your premiums will drop as you pay down your principal balance, but the insurance never goes away. The lender figures your annual mortgage insurance premium based on the average annual balance of your mortgage each year. They then charge you 1/12th of that amount with your mortgage payment each month.

The only way to get out of paying mortgage insurance on a government-backed loan is to refinance out of that loan program. Many borrowers take an FHA loan because of the low down payment requirements and flexible underwriting guidelines when they first buy a home. Once they are more established and able to qualify for a conventional loan, owing less than 80% of the home’s value, though, they refinance out of the FHA loan. This eliminates the mortgage insurance once and for all.

VA Loans and Mortgage Insurance

The one government-backed loan that doesn’t require mortgage insurance is the VA loan. This program, which is reserved for veterans, requires only a VA funding fee at the onset of the loan. The VA nor the VA approved lenders require mortgage insurance.

The VA does guaranty the loans for the VA approved lenders, though. If a veteran defaults on their loan, the VA pays the lender 25% of the amount lost. This is often much higher than any down payment borrowers make, so it’s a decent risk for lenders to take.

Mortgage insurance is there to help you get a loan with little money down on it. While it seems like yet another pesky fee, it does help you become a homeowner. Without that insurance and/or 20% down on the home, you could find yourself without the home you wanted.

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Finding Financing for Your Investment Property

February 21, 2017 By Justin

Finding Financing for Your Investment Property

Investing in real estate is a lucrative way to grow your money, just ask Warren Buffett. From a single-family home to a multi-family building, an investment property is an income-producing venture for years to come.

There are many ways to fund your first-ever foray into the world of real estate investing, such as (a) mortgages, (b) home equity loans and (c) investment property loans.

Buying or refinancing a home this year?»

Stated Income Loans, et al. for Investment Property

Besides primary residences, mortgages have been used to purchase rental properties. Despite its investment-driven purpose, these mortgages are classified residential because they cover one-to-four unit properties.

  1. Stated income loans are made for self-employed professionals, small business owners and high net-worth individuals who are into real estate investing. It’s no surprise because a typical down payment on a stated income loan is 30% at the minimum. Stated income lenders also need a higher level of cash reserves sufficient to cover three to 12 months’ worth of monthly mortgage payments.
  2. By their stated purposes and intents, you can’t use an FHA loan to purchase an income-producing property. But situations are replete when it has been used for investing. Say you took out an FHA loan and then moved out of the house and have it rented out. In another case, you buy a duplex where you plan to occupy one unit and lease the other. Down payment for FHA loans could go as low as 3.5% for a credit score of at least 580.
  3. Conventional loans conforming to Fannie Mae and Freddie Mac’s standards can require at least 30% of the purchase price of the income-producing home as down payment. There should be enough cash reserves to meet six monthly mortgage payments. Moreover, a property management experience (being a landlord) of at least two years is required.

Take the first step toward homeownership.»

Home Equity Loans for Investment Properties

Home values are expected to rise by 3.5% this year per Zillow. This bodes well for those who own their home outright or hold a significant equity in their homes.

Second mortgages such as a home equity line of credit or home equity loan can be used to finance the down payment on the second home. Back this second mortgage with cash savings and asset holdings for emergencies.

Using home equity is a popular way to do some house flipping, it is when you buy a home, renovate it and resell it for a higher return.

Investment Property Loans

These specialized loans are for individual and commercial real estate investors. Investment property loans are structured to assist investors in:

  • Financing and fixing properties
  • Refinancing existing properties

One final word. Just some reminders to help you with your property investing venture:

  1. Do your homework first before you put your hard-earned money or home equity on any property.
  2. Make sure that the desired property is eligible to be financed.
  3. Expect to generally see higher down payment requirements, higher rates, and bigger cash reserves on investment properties.

Are you ready to be an investor? Talk to us today!»

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