In a perfect world, when you go to buy a house you would have at least 20% of the home value to put down as a down payment. It’s that magic number that lenders want to see. If you can reach this magic number then lenders are happy to reward you with a favorable interest rate. However, it’s not uncommon for home-buyers to fall short of this 20% down payment. I see this a lot in first time home-buyers but it can happen to anyone. Lender’s are still willing to work with borrowers in this situation but it wont come without a cost.
Not only will that cost show up in a higher interest rate, but the lender is likely to charge you Mortgage Insurance Premiums. This is basically the lender’s way of covering the risk of lending to a home-buyer that will be starting out with very little equity in the home. You as the borrower might be fine with this because you are getting the money you need to buy the house you want and this is just a small cost to do so. And I would imagine it’s not uncommon for you to completely forget you are paying it as time goes on. Something you may also forget (or maybe not know) is that you don’t have to pay these premiums forever.
According to a study by The Urban Institute, as of 2016 48.8% of all mortgages in the US had mortgage insurance.
Over time as you make your monthly payments and hopefully your house goes up in value, more and more equity is created. Once you’re equity reaches a certain level (often 20%) then these monthly premiums are no longer needed. However, your lender wont be beating down your door to share with you the good news. This is something you will have to be proactive about. You may have luck just going to your lender and asking them if it can be dropped. If you’re not there yet, ask them what the magic number is you need to get to. If this doesn’t work they may give you the option to refinance to get it dropped. You would have to weigh the cost of refinancing with the amount saved from dropping the premium. You may even get a better rate now that you have more equity so there is a good chance refinancing would be worth it.
In the past Mortgage Insurance Premiums were at least tax deductible as an itemized deduction. So the cost of these premiums was slightly offset by the very small tax savings if you itemized. But now Mortgage Insurance Premiums are no longer tax deductible. This is just more reason to take a look at your mortgage and talk to your lender to see if you can get this premium out of your life for good.