Getting a home loan is one of the most stressful things we can do and understanding all the repayment options can be a headache. Mortgage insurance seems to make the situation worse as property buyers are unsure if they need it or if they can do without and how it gets calculated.
We have put together some hints and advice to help steer you through the uncertainties many people have with mortgage insurance.
Do you need mortgage insurance?
A lender will advise you whether insurance premiums are required for your home loan. Any homebuyers with less than 20% deposit should expect to pay insurance premiums.
The insurance is to cover any people who fail to make their mortgage repayments.
Home buyers with more than 20% deposit may still need insurance if they have a poor credit history or have had debt issues in the past.
Should you avoid mortgage insurance?
Nobody wishes to pay insurance but, in some cases, it may be the only way to get on the property ladder.
Ideally, you would like to enter into a loan agreement for your home with no additional premiums needed, and this will keep your ongoing cost lower. For young home buyers with little financial history, they may need to pay insurance even though they have a sizable deposit. It's important to speak with a mortgage broker and see what the best option is. Mortgage brokers will give you free advice so you might as well take advantage of it.
Mortgage insurance should be avoided when possible, but it can be useful in helping those with limited finances to own a home.
How can you get out of paying mortgage insurance?
The only foolproof way to eliminate paying insurance premiums is to save a large deposit and have an excellent financial track record along with proof of salary and income.
For most people who have a deposit over 20% paying insurance will not be required as there is enough equity for the lender to recover any losses should you default on the loan.
Being regimented in keeping a financial history and checking your credit report to ensure there are no problems will help to lessen the need for insurance.
If possible, getting a letter from your employer detailing the expected salary over the coming years will bolster your chances of reasonable rates and no insurance to pay.
How do you calculate Mortgage Insurance?
The calculation for mortgage insurance is relatively simple and can be done quickly.
The formula considers how much the home is worth, how much has been paid and what is still owing on the property.
An easy way to check expected premiums is to use an online mortgage insurance calculator There are many such tools provided for free online and will allow you to find out exactly how much insurance you need to pay.
If you want to calculate your estimated insurance premiums yourself, you need to divide what is still owed on a property by the property value, and this should give you a figure like 0.9, which is then multiplied by one hundred and after consulting your lender's insurance rates chart you will get the number you need to pay each year.
Do you pay for the lifetime of the loan?
The requirement to pay mortgage insurance is only determined by your ability to repay the loan and the amount of equity in the property.
Once you have been paying your mortgage and have paid off over 20% of the value, the insurance premiums should cease, many lenders keep the insurance until only 78% is left to be paid. If you have reached this point but are still paying each month, you should speak to your lender and request to stop paying.
For homeowners looking to refinance the property the same criteria will apply, you need to have 20% of the property value paid in full to eradicate the need to pay insurance premiums.
Quick tips
- Save for a deposit of more than 20%, the more you pay off up front, the better.
- Keep a detailed history of your finances and all your bank details for the previous five years.
- Ask your employers for a letter with salary expectations and current income
- Keep up to date with what is still owed on your property. Speak with your lender if you have paid above 20% of the property value.
Final words
There is a wealth of resources online to help anyone who is looking to get on the property ladder.
Take the time to fully understand how a home loan works, how it is calculated and what you expect the repayments to be, not just this year, but a few years further on. Use online tools like the refinance mortgage calculator from Lowermybills.com to help you calculate your new monthly payment, interest rate, and potential savings across several different loan types.
Speak with lenders and brokers to get the best advice and options for the area you are looking to purchase property, these people deal with this all year round and have extensive knowledge.
Never be rushed into agreeing to a loan, always check with other lenders to make sure you are getting the best deal.
