Lender Paid Mortgage Insurance
To eliminate monthly mortgage insurance, you don’t always have to put 20% down. Conventional loans allow for several options if you wish to avoid paying mortgage insurance.
When using Conventional financing with 3, 5,10 or 15% down, you could go with an option called Lender Paid Mortgage Insurance. Lender paid mortgage insurance eliminates your monthly mortgage insurance, however it comes with a higher mortgage rate. To determine if lender paid mi is the best option for you, we would compare it with the other options to see if it makes the most sense for you.
For some people, mortgage insurance may be tax deductible (income limits apply), but for others it’s not. If you cannot deduct your monthly mortgage insurance premiums, you may benefit from the lender paid mortgage insurance option, since you can still deduct your mortgage interest each year.
Monthly mortgage insurance is typically required to be paid for no less than 2 years before you can request to have it cancelled. In order for it to be cancelled, you would need to have no less than 20-25% equity in your home. There are some situations where monthly mortgage insurance may still be the best strategy for you, even if your income is too high to deduct the mi at tax time.
*tax law is always changing and we are not tax advisers, so always be sure to speak with your CPA about the current tax implications
Eliminate the need for mortgage insurance by using a second mortgage. This is commonly referred to as a combo loan, 80-10-10 or 80-15-5. What this means is that you take out a first mortgage at 80% of the sales price and then a second mortgage to cover the additional 10-15%, leaving you with only 5-10% for the remaining down payment.
The first mortgage at 80% eliminates the need for mortgage insurance. The second mortgage is typically a home equity line of credit.
Home equity lines of credit are also used many times to finance more than the county loan limits allow. Since the loan limits in most high cost areas stop at $636,150, many times applicants looking at homes in the $700,000 plus price range might opt to take out a first mortgage at $636,150 and then take out a second mortgage up to 95% total combined loans, leaving the down payment still just at 5% down. This allows for a low down payment even when the price of the home is much higher than the loan limits.