Purchasing a new house is both exciting and stressful. The majority of new homeowners believe they have overpaid for all of the costs related to their acquisition. Although some of these expenses are necessary, others, such as mortgage insurance, require careful consideration.
So, should you add mortgage insurance payments to your already long list of financial obligations, or should you hold off on purchasing your ideal home until you can save a larger deposit? We will help you find the best way.
What is mortgage insurance?
When you use a regular mortgage to finance your new home, typically, your lender will require a 20% deposit or more of the purchase price. But it does not imply that credit institutions such as banks, credit unions, or newly established institutions will turn you down. However, they almost always demand that you pay for PMI.
The mortgages approved by government institutions such as FHA or USDA also require mortgage security agreements. These loans have many advantages e.g., lower transaction costs, lower down payments, lower loan requirements, etc. Therefore, consider MIP rates during the calculation process.
The goal of home loan security charges is to limit the risk of creditors as the agreement’s sole beneficiary. However, you must pay the mortgage insurance within the specified time frame.
When your net worth reaches about 22% of the property’s appraised value, the lending institutions will automatically cancel your PMI. Furthermore, to use MIP (Government Guaranteed Loan), you must pay 22% of the total loan for five years before canceling the mortgage security charges.
How to calculate the cost of mortgage insurance?
Calculate the cost of the mortgage security to evaluate if it is cheaper to pay the mortgage insurance premium or the down payment in advance.
The easiest way to compute mortgage insurances is through the mortgage calculator. Nonetheless, you can also calculate it manually. Prepare the checklist of your mortgage documents as you will need a reference for loan calculations.
1. Start with the purchase price of the property and calculate the loan to its value ratio:
The higher the interest rate (as a result, the lending institution’s risk in providing you money is higher), the higher the mortgages security payments will be.
LTV= loan amount / property value
2. Check the terms of your loan
The loan agreement depends on your bank, your credit history, type of mortgage, etc. Moreover, it also includes the mortgage insurance rate that accounts for 0.3 percent to 1.15 percent of the actual loan amount per year.
3. Calculate the mortgage insurance amount:
Annual Mortgage Insurance Amount = Loan amount x insurance rate Monthly Payment = Annual mortgage insurance / 12
Monthly Housing Payment = Loan interest + loan principal + taxes + monthly mortgage insurance payment.
Planning for the Future
Finding the amortization of home loan insurance costs is not an easy task. To decide the best alternative, you must carefully assess your existing financial condition and future intentions. Therefore, A mortgage is a long-term investment that can last a lifetime. Also, there are various alternatives for paying mortgage insurance premiums or private mortgage insurances.
(i) You can wait until you have enough cash to make a down payment of 20% or more before buying a house. However, during the waiting time, you can use the money to pay rent, increasing your ownership interest.
(ii) You might ask the lender to waive home loan security requirements in exchange for a higher purchase price interest rate. Because mortgage insurance is only required if you own at least 20% of the home, you will almost certainly pay extra. Unlike mortgage insurance expenses, mortgage payments are tax-free.
(iii) You can purchase a second mortgage (or piggyback mortgage) at the same time as your primary mortgage. It will enable you to fund the gap between your present down payment and the 20% required to avoid paying mortgage security.
The best solution depends on your financial situation, credit rating, and current living conditions. Do visit RateChecker.com to learn more about home loans and mortgages.