Refinancing, it’s Not Just about the Rate

We hear a lot of financial noise, it permeates the news. We are bombarded with information about interest rates and the Fed. Interest rates are a very important piece of the mortgage puzzle but that is not the entire picture. Your monthly payment may also include mortgage insurance. The mortgage insurance premium is determined predominatly by two components, the amount of the loan and your credit score.

Depending on your loan type, you may or may not be able to remove mortgage insurance. A conventional loan will remove the mortgage insurance once you have reached a threshold of 78% of loan to the value of the home. For example: if you purchased a home for $100,000 and borrowed $90,000 once the loan was paid to $78,000 the mortgage insurance would be dropped. You may request the insurance be removed at 80%, and you should, but it will not happen automatically until the 78% loan-to-value has been reached.

If you have a FHA loan, as of 2013, you will have mortgage insurance for the life of the loan. In other words, a 30 year loan will have mortgage insurance for 30 years. The mortgage insurance premium can be a significant monthly expense. Loans issued prior to the 2013 change have a provision similar to a conventional loan and the insurance is removed at some point. The only way to remove the insurance premiums on a FHA loan is to pay the loan off or refinance.

Keep in mind the mortgage insurance is of benefit to the lender only, as the borrower you are obligated to keep insurance based on the parameters of your loan type, but it is in place to protect the lender. It is advisable to speak with a mortgage professional and explore your options to not only lower your interest rates but also address mortgage insurance premiums, as this savings could be more significant than a reduction in interest rates.

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