{"id":1143589,"date":"2019-10-12T11:00:44","date_gmt":"2019-10-12T16:00:44","guid":{"rendered":"https:\/\/dailyreckoning.com\/?p=108121"},"modified":"2019-10-12T11:00:44","modified_gmt":"2019-10-12T16:00:44","slug":"why-understanding-mortgage-insurance-could-save-you","status":"publish","type":"post","link":"https:\/\/juniorminingnews.com\/?p=1143589","title":{"rendered":"Why Understanding Mortgage Insurance Could Save You"},"content":{"rendered":"

This post Why Understanding Mortgage Insurance Could Save You<\/a> appeared first on Daily Reckoning<\/a>.<\/p>\n

Mortgage rates have been dropping for the past few months, with a 30-year fixed falling to 4% recently according to FreddieMac. And now there\u2019s the possibility that the Fed will lower interest rates again this fall. So this could be the ideal time to buy that home you\u2019ve been eyeing.<\/p>\n

But suppose you have credit problems or haven\u2019t saved enough for a hefty downpayment (20% for most conventional loans)?<\/p>\n

Data from U.S. Mortgage Insurers (USMI) revealed that it could take 20 years for a household earning the national median income of $61,372 to save 20%, plus closing costs, for a $262,250 home, the median sales price for a single-family home in 2018.<\/p>\n

And by the time you do, housing prices may have substantially increased to the point of becoming out of reach. In other words \u2026 it\u2019s like trying to hit a moving target.<\/p>\n

The reality is that banks are reluctant to trust potential borrowers who have poor credit or can\u2019t invest much of their own money in a home. They want assurance that you\u2019re a good risk and can be trusted. And in their eyes, the lower the down payment the riskier the loan.<\/p>\n

Moreover, coming up with a 20% down payment can be a humongous hurdle for first-time buyers who don\u2019t have much in savings or any equity in a current home.<\/p>\n

But lack of cash doesn\u2019t mean you can\u2019t achieve the American Dream \u2026<\/p>\n

How Private Mortgage Insurance (PMI) Bridges the Gap<\/h3>\n

PMI protects the lender in case the borrower defaults on the mortgage.<\/p>\n

The premium is based on your credit score, the loan-to-value ratio (LTV) of the home, and whether the mortgage will be fixed or variable rate.<\/p>\n

The better your credit, the lower the premium. Another good reason to build good credit.<\/p>\n

The LTV ratio is the amount you want to borrow compared to the value of the home securing the loan.<\/p>\n

For example, if you hope to borrow $180,000 for a $200,000 home, the ratio would be: $180,000 \u00f7 $200,000 = 90%.<\/p>\n

But if you can come up with more cash and only need to borrow $170,000, the ratio becomes: $170,000 \u00f7 $200,000 = 85%.<\/p>\n

So as far as the lender is concerned, the lower the ratio \u2026 the less risk in making the loan.<\/p>\n

The Important 78% Mark<\/h3>\n

PMI isn\u2019t cheap. Typically it costs 0.3% to 1.5% of the original mortgage amount each year. That means PMI at 1% for a $180,000 loan could cost you $1,800 per year, or $150 per month. The lender tacks this premium to your monthly payment.<\/p>\n

So you want to get rid of it as soon as possible.<\/p>\n

As you make mortgage payments the amount you owe slowly declines and your equity rises.<\/p>\n

When the LTV falls to 80%, you can ask your lender to drop PMI. However, they are not required to do so.<\/p>\n

But once it hits 78% (you have 22% equity in the home) they must eliminate the insurance.<\/p>\n

So in the above example, when the mortgage drops to $156,000, the LTV falls to 78% and would be canceled.<\/p>\n

There are several ways to reach this mark sooner:<\/p>\n