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Goodbye, Mortgage Insurance

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Posted On: 09/07/2016

Question: I financed my home with a conventional loan in 2013 and it now costs me $110 a month for mortgage insurance, a cost I want to drop. I have an 800 credit score, I’ve never had a late payment and my interest rate is now at 4.75 percent. How can I get rid of the mortgage insurance.

Answer: According to Freddie Mac, the average mortgage rate in 2013 was 3.98 percent, so your interest level seems high for that year and it’s certainly high for today – as of early July fixed-rate loans were priced at roughly 3.4 percent.

You have a high credit score but by any chance was your score lower three years ago? That may account for your current interest rate.

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You were required to obtain mortgage insurance because you financed with less than 20 percent down. Now, three years later, your mortgage balance should be lower because of amortization and likely you have more equity because home prices have generally risen around the country.

There are several basic ways to cancel mortgage insurance for a conventional loan in your situation.

First, you can ask the lender to end your coverage once the loan balance reaches 80 percent of the original debt.

Second, the lender in most cases is required to end mortgage insurance once the loan balances falls to 78 percent of the initial debt. However, if you just make your monthly payments it will take a very long time to reach the 78 percent level: about 11 years with your interest rate.

Third, ask the lender if mortgage insurance will be removed if you pay down the mortgage with a big cash infusion. However, given your interest rate this may not be a good option.

Fourth, you might want to consider a refinance, especially if you expect to keep the new loan for many years. Given additional equity and less debt, you might qualify for financing without mortgage insurance. Not only that, your monthly cost for principal and interest will shrink substantially with a new and lower mortgage rate.

Let’s say you have a $200,000 loan. At 4.75 percent your monthly cost for principal and interest is $1,043 a month. After three years the loan balance has been reduced to $190,285. If you refinanced $190,285 over 25 years at 3.4 percent your new payment for principal and interest would be $942. With a lower rate and no mortgage insurance you’ll save about $210 a month.

Why 25 years and not 30? Because a new 30-year mortgage will give you a lower payment ($844 a month) but also a longer loan term. With the shorter loan you will reduce your potential interest cost from $92,477 for 20 years versus $113,512 for 30 years. Of course, if monthly income is an issue then you may want to consider the 30-year option.

Lastly, you have to shop for rates and terms. Speak with your lender, but also speak with other lenders. Get specifics and details and let them fight for your business.

Peter G. Miller is author of "The Common-Sense Mortgage," (Kindle 2016). Have a question? Please write to peter@ctwfeatures.com.

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