Follow the next four steps and discover if you are overpaying your lender; understand your mortgage payments, mortgage insurance, your home market value, and navigate your options.
- Mortgage monthly payments
You send one monthly payment to your lender. By understanding what your payment entails. you can check if there is any way to reduce the payment.
Review your monthly statement bill or your account online, and compare the following:
PITI are the initials for Principal, Interest, Taxes, and Insurance.
Some loans will allow you to pay only Principal (your debt amount) and interest, and you can pay your property taxes and home insurance on your own. Other mortgages will require you to escrow the property taxes and home insurance, which means that part of your monthly payment is set aside in escrow to cover the cost of the property taxes and home insurance when due. Some will prefer to escrow the taxes and insurance payments even though they are not obligated to do so, as in this case, there are two fewer things to worry about.
Before continuing, check the following:
Did your home insurance premium increase? As it is bundled with the total amount you are paying the lender, it is easy to miss or misunderstood if other parts of the monthly payment increase, such as property taxes. If your home insurance has increased, shop around. Compare. You have the right to change insurance providers; just update your lender. Do you know what mortgage program you have? Conventional, FHA, VA, or other? In your monthly escrow amount, do you send additional payments as mortgage insurance? Check all, and let’s continue understanding mortgage insurance.
- Mortgage Insurance
Mortgage Insurance is different from home insurance. It does not serve you, the homeowner. It lowers the risk to the lender of making a loan to you, so you can qualify for a loan that you might not otherwise be able to get. Typically, borrowers making a down payment of less than 20 percent of the home’s purchase price in a Conventional loan, or if you have an FHA loan (Government insured loan), will need to pay for mortgage insurance.
You will hear the terms PMI and MIP. A mortgage Insurance Premium (MIP) is an upfront and monthly mortgage insurance premium required when you do an FHA loan. Private Mortgage Insurance (PMI) is the mortgage insurance you pay when you have a conventional loan and put a down payment of less than 20%.
There is one big difference you need to be aware of:
In a conventional loan, you will pay the mortgage insurance payment until your debt gets to 78% of the home value.
In an FHA loan, you will pay the MIP for a set number of years or for the life of the loan, regardless of your current debt percentage.
Why do you need to know all this? Because if you do pay your lender mortgage insurance, you should be aware under what terms you can stop paying it.
- Your home market value, LTV, and what it means for you.
When you purchased your home, the lender calculated your down payment as a percentage of the purchase value. For example, if you paid a $30,000 down payment on a $300,000 home a few years ago, you paid 10% down, and your debt was 90% of the home’s value. As you pay down your debt, the lender will compare your debt to the home’s original value to determine your Loan-to-Value (LTV), regardless of your home’s current value. If you have a conventional loan, the PMI should be dropped when your debt is down to 78% LTV.
With the $270,000 loan mentioned above, in a 30-year mortgage at a 5% interest rate, if you do not make additional payments to the lender, it will take you over seven years to drop the PMI! On the other hand, after three years, the principal will be down about $12,000, and if your home increases its value by $30,000, your LTV is under 80%. The numbers used are just an example for better understanding. You need to be aware of your home’s market value, and as your debt is being paid off, did your LTV reduce enough to call your lender?
- Your options
If you have a conventional or FHA loan, you will approach the options differently to stop paying the mortgage insurance.
If you have a conventional loan, Be aware if your home’s market value increases, and as a result, if your LTV is reduced to under 80%, you do not need to refinance the mortgage. You call your lender and ask for an appraisal. The lender will then recalculate your LTV based on a new appraisal. You will be charged for the appraisal, but often it will be balanced fast as the PMI is dropped. Check with your lender about their requirements to send an appraisal and the costs involved. If, theoretically, the appraisal comes back with a different market value than what you thought, let’s assume your LTV is now 81%. The PMI will not drop yet, but it will occur much sooner than expected, as your debt will be compared to the new appraised home value.
If you have an FHA loan, you can’t drop the MIP, unless you refinance to a conventional loan. In this case, check the numbers, as the fact you are paying mortgage insurance does not mean you do not have a good loan. A mortgage insurance payment while having a low-interest rate, can be more beneficial than a high-interest rate with no mortgage insurance.
Is it convenient for you to refinance? Can you qualify for a conventional loan? Do you have enough equity to do a cash-out refinance if desired? What is the option that can benefit you the most? Let the numbers talk.