Tip #8 in our series on how to save money when buying a house is: Avoid MIP by getting a second mortgage MIP is called Mortgage Insurance Premium. This is a form of insurance that you are required to pay for if your loan if greater then 80% of the value of the house. So for example, if you buy a house for $100,000 and you get a 5% down loan, you will pay a monthly mortgage insurance premium until the balance of your loan drops below 80% of the value of the house. In this case, $80,000.
Mortgage Insurance is for the lender. Not you. If you borrow more than 80% of the value of the house, the lender will REQUIRE to you pay for Mortgage Insurance. This is to protect the lender in the case you default and they foreclose on you. In that case the insurance company will pay the lender part of the money you owe them.
Mortgage Insurance has no benefit for you. But you will be forced to pay it until your loan balance is less than 80% of your home's value. Make sure you do not confuse mortgage insurance with homeowner's insurance. Homeowner's insurance protects you in case something happens to your house. Mortgage insurance only protects the lender from default.
Here's why all lenders require this. If a house is foreclosed on, there are several expenses the lender has to pay. Legal fees, home repair, selling costs, etc. In order to foreclosure, evict the homeowner, repair the house to selling condition and sell the house, the lender will pay on average 20% of the value of the house. So if the lender has let someone borrow $95,000 for a $100,000 house, and the lender has to foreclose, the lender will end up losing about $15,000.
Lenders do not like losing money so they get you to pay for insurance that says that is they have to foreclose, the insurance company will pay them the 20% that they will end up paying in costs. There are two ways you can avoid paying for Mortgage Insurance. The first is if you have 20% for the down payment. If you do not then you will have to go with method number two. And that is with a second mortgage.
If you have 10% to use for the down payment, instead of getting a 90% first mortgage, you can get an 80/10/10. That is an 80% first mortgage, a 10% second, and 10% down. They also have 80/15/5 if you only have 5% down payment. Ask your mortgage broker for more details. So with these programs you will have two mortgages. Both with separate interest rates.
The second mortgage from the lender's point of view is more risky and so they will charge you a higher rate for the second then for the first. The good part is that is you get the first and the second from the same lender, you will not have to pay closing costs for both loans. The costs can be combined. And if you really want to, you can pay off the second mortgage earlier then the first.
That way you will have more equity in the house, you will have avoided paying any mortgage insurance premium, and you will have only one mortgage at a low rate.
Abby Kamadia, is a mortgage consultant, and real estate broker in Houston Texas. For the 69 other free articles on saving money when you buy a house visit Abby's Houston Texas Real Estate website.