For most homeowners who have a mortgage, there is a fee that they must pay with their mortgage payment, which insures not them but the lender against any loss resulting from a foreclosure or short sale. This fee is mortgage insurance.
If you have an FHA loan, or you have less than 20% equity within your property, there is a good chance that you are or will be paying mortgage insurance on your monthly payment. The amount of mortgage insurance or MI, you’ll have to pay usually depends on the amount of equity that you have, however MI payments are generally several hundred dollars a month.
Now conventional wisdom, and the law for that matter, tells us that when we have 20% equity in our property, the lender can longer require you as the borrower to make mortgage insurance payments. However, there are couple of methods that are less known, which a homeowner who has less than 20% equity can use to remove their MI payment from their mortgage.
First Method to Eliminate MI
The first method involves using a loan product called LPMI, which stands for Lender Paid Mortgage Insurance. With this loan, the borrower does not have to pay mortgage insurance even if they have less than 20% equity, because the MI payment is factored into the interest rate. This means that the interest rates on the LPMII product are typically higher (by about .375% – .5%) than a standard conventional loan where you would pay mortgage insurance. Though the interest rate is higher, many borrowers still save money by using LPMI due to the money savings from eliminating MI.
Second Method to Eliminate MI
Another method that a borrower can use involves two home loans, with the first home loan acting as a traditional 15 or 30 year fixed and the second home loan acting as a Home Equity Line of Credit (or HELOC). When using this strategy, the borrower only has to have 10% equity in the property in order to avoid having to pay mortgage insurance. One to thing to note however, is that the balance on the Home Equity Line of Credit, is almost tied to an adjustable rate which usually starts off with interest only payments.
So for example, if you had a loan amount of $315,000 and your property value was $350,000, you could split your loan of $315,000 into two separate loans as shown below to avoid mortgage insurance payments.
1st Loan = $280,000 (30 year fixed)
2nd loan = $35,000 (HELOC)
Property Value = $350,000
CLTV = 90%