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AMERICAN CAPITAL
MORTGAGE, INC.
444 Galisteo Street, Suites B & C
Santa Fe, NM 87501
Toll-Free: (877) 663-4422
Direct: (505) 983-9222 or 988-4422
Fax: (505) 983-7988 or 988-3872
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How to Avoid Paying Mortgage Insurance
(Originally published in Santa Fe Real Estate Guide / The New Mexican)
Mortgage insurance is an unnecessary cost to homeowners and should always be avoided when applying for a home mortgage.
Mortgage insurance insures the top 20 percent of mortgage loans against default and is required when the first mortgage on your home is greater than 80 percent of the appraised value.
This insurance does not qualify for a tax deduction and normally the extra cost varies from 0.4 percent to 0.65 percent per year for a home mortgage in excess of 80 percent LTV (loan-to-value ratio). At 0.65 percent per year, mortgage insurance on a $300,000 mortgage will cost the borrower $162 per month. The good news is that there are ways to avoid this extra cost.
Second Mortgage
For those borrowers needing financing greater than 80 percent of the purchase price, a second mortgage can be secured at time of purchase for 10 percent to 15 percent of the purchase price. With the example of a $300,000 purchase, if you want 90 percent financing you can make a 10 percent down payment get a first mortgage for 80 percent and then get a 10 percent second mortgage. The 10 percent second mortgage, besides saving the borrower the cost of mortgage insurance, gives the homeowner the flexibility to pay off the second mortgage, leaving the first mortgage at a lower payment than if the first mortgage had originally been a 90 percent loan.
Retirement Plans
Most retirement plans allow the beneficiary to borrow a certain amount of the principal invested. Borrowing from your retirement plan can be used to pay the extra 10 percent down. Also the interest rate for retirement plans is usually more favorable than bank financing and basically you are paying yourself.
Equity Second Mortgage
Another method of avoiding mortgage-insurance payments on a 90 percent loan is to pay 20 percent down when you purchase your home and then, after closing, finance an equity second loan to recoup the amount of the down payment desired. No mortgage insurance is required with an equity second mortgage. Some mortgage programs such as “no doc” loans require a 20 percent down payment at time of purchase.
Refinance
If you can only afford to put down 5 percent to 10 percent at closing, try this method to avoid mortgage insurance: Purchase the property with a 95 percent loan. After a short time period, refinance the property. When refinancing a home mortgage the appraised value is used to determine the property value. In many cases this value will be great enough after six months to a year to refinance the existing mortgage without having a loan above the 80 percent LTV level.
Refinancing your property after the value has increased can be a very effective method of saving the mortgage-insurance cost. There is no waiting period for the refinancing for most loans. Even after a few months a new appraisal may indicate enough value to refinance to an 80 percent LTV loan.
Cancel mortgage insurance
Borrowers with existing loans carrying mortgage insurance may apply to their lender to cancel it. If you can demonstrate, usually through an appraisal, that your loan is below 80 percent of the value of your home, many lenders will cancel the mortgage insurance.
Some borrowers may not want to invest more than 5 percent to 10 percent in their house purchase, leaving investments in place and maintaining the highest home interest deduction possible. Using creative financing with the assistance of a knowledgeable mortgage company this goal can be accomplished without the unnecessary cost of mortgage insurance.