Are You Familiar With Real Estate’s 80/20 Rule?

There is no doubt that the Florida real estate market is as sizzling as the weather in the Sunshine State. Before you jump into these great opportunities, you need to make sure that you understand the specifics of the 80/20 rule and how it relates to mortgage insurance. Here is what you need to know about this topic.

What is Mortgage Insurance: When purchasing a house, a lender will require you to add on an additional Mortgage Insurance (MI) policy if your down payment is less than 20% of the total price of the property. This extra insurance is mandated because research has shown that buyers who put down less than 20% initially are at a higher risk of going into default with the loan. Because lenders typically lose money when a property goes into foreclosure, this MI mitigates the risk of loss for the entity lending the money. However, while the MI policy protects the lender against loss, it is the buyer who is responsible for paying the MI premium.

Understanding the Specifics of MI: How you pay your MI largely depends on the type of loan program that you are using and the associated insurance requirements. For example, some of these premiums must be paid upfront while others will be an additional cost to your monthly payment. If you are choosing a conventional mortgage, you will pay the premium to a third-party insurer. Conversely, the premium will go to an insuring government agency if your loan is through this type of entity.

It is also important to note that if you are paying your MI upfront on a government-insured loan, you can choose to include this amount in the total loan. However, you will need to pay the MI upfront at the time that you close on the property if you are using a conventional loan. While this may seem confusing at first glance, a professional mortgage broker will be able to walk you through the process and help you to find the best approach for your personal needs and financial situation.

Removing the MI: The good news is that you are not beholden to this extra insurance for the entirety of the loan. The U.S. Homeowners Protection Act (HPA) of 1999 gives borrowers the right to request that the MI payments be removed as soon as the principal balance of the loan reaches the 80% loan to value (LTV) mark. With home values increasing at a breakneck speed, this benchmark may happen more quickly than you anticipated.

The HPA also mandates that lenders are required to remove the MI when the LTV hits 78% of the original value of the home when the loan was initiated. However, this mandate only applies to borrowers who are using a conventional mortgage and does not encompass FHA financing.

When looking for homes for sale in Lakeland, be sure to take the time to understand how the 80/20 rule may apply to you.