The most common type of mortgage on a first home is an amortized 30-year fixed interest loan. What that means, is that the amount you borrowed to buy your home will be paid off over 30 years, with equal payments each month that include money paid to the principle loan balance, the interest, taxes and insurance. This loan is also sometimes called a Budget loan (because you pay taxes and insurance throughout the year instead of in one big payment; it helps you to budget your money) or a PITI loan (principle, interest, taxes, insurance).
The last I in the PITI loan, insurance, actually sometimes encompasses two things: home owner’s insurance, and if you did not put at least 20 percent down on your loan, mortgage insurance. Mortgage insurance is usually referred to as PMI (private mortgage insurance) for a conventional loan and MPI (mortgage payment insurance) for a government insured loan, like an FHA loan. The idea behind mortgage insurance is that if you don’t have at least 20 percent equity in your home your lender considers you to be at higher risk of defaulting on your loan. You are therefore required to pay for an insurance premium in case you do just that. This can be a fairly substantial monthly payment. We pay $105 per month (roughly 10 percent of our total payment) for this alone.
Something to think about, in this time of quickly rising home values, is that even though you may not have put at least 20 percent down on your home originally, you may have benefited from the the quickly moving market and not even know it. If you bought your home for $120,000 three years ago, and you put down 3 percent ($3,600), but now home values have risen so far that you could easily sell your home for $180,000, that means that you gained over $60,000 in equity without paying out cold hard cash. If you were to refinance your home now, the bank would appraise it at the current home value standards and you would no longer be responsible for your monthly mortgage insurance payment. That’s an extra $100 or so you could be applying toward the principle of your loan, or even to new cute shoes once a month!
Make sure, before you decide this sounds too good to pass up, that you find out what your current interest rate is as compared to the market interest rates. If your rate is lower than what the market stands at, you probably want to stick with it. Also be sure to ask your new lender about closing costs. Many large lenders have deals that involve refinancing with no closing costs. This may come with a slightly higher interest rate, but if you don’t plan to stay in your house the full 30-year life of the loan, it’s probably worth going with the higher rate minus the thousands of dollars in closing costs.
Check it out, it may just be the smart decision for you!