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The process of buying a new home can be complex, from understanding how teaser mortgage rates don't represent your true, out-of-pocket costs to passing up mortgage preapproval to potentially missing out on the house you've had your eye on. Clearly, it pays to know the ins and out of getting a mortgage.
That's why Motley Fool analysts Kristine Harjes and Nathan Hamilton discuss in the following video one mistake homeowners make that may end up costing them money.
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Kristine Harjes: So we're here today talking about mortgages, and I've come to realize there are so many acronyms when you're talking about this subject.
Nathan Hamilton: PMI today.
Harjes: Exactly! That's what we want to dive into right now. Nathan, do you want to kick us off? What is PMI? What does it stand for? What does it mean?
Hamilton: It's private mortgage insurance. And if you are putting less than 20% down on your mortgage on your new home, you're going to be hit with a fee.
Harjes: PMI.
Hamilton: PMI. The banks essentially lob that fee at you because anyone putting down less than 20% is perceived by banks to be more risky, so the banks want to ensure they get their money back. There is, of course, that fee that's tacked on.
Harjes: Right. It makes sense. You want to make sure that you're recouping your investment if you're the lender. So how much is this going to end up costing people trying to get a mortgage?
Hamilton: So the one thing to be aware of -- the one mistake that people may make that may end up costing them -- is you can actually request that private mortgage insurance be removed when essentially you're at 80% of your loan value on your home. So you can request for it to be removed, but banks are only required to remove it at 78%, so there is that time frame in there where if you don't follow up with your bank -- many require some sort of notice in writing -- you're going to be paying private mortgage insurance when you don't need to.
Harjes: It seems like kind of a pesky process to actually apply and get this.
Hamilton: Very pesky, yes. A lot of times, as I mentioned, you have to write in and provide additional proof. It's definitely a policy that's in the bank's favor, but ultimately we have to comply. Just be aware of it.
Harjes: And you can see why a bank would want to do this. They're continuing to rake in a couple of hundred dollars a month, potentially, from you just based on this.
Hamilton: I don't think it's the best way to do business, but obviously it is something you just need to pay attention to.
Harjes: Yep, and as long as you know your rights and that once you hit that 78%, the bank is required to lift this, then you're in the clear past there.
Hamilton: Yeah, and a couple of hundred bucks saved on your monthly mortgage payment.
Harjes: Absolutely. Month in and month out, that's huge. If you're looking for more ways to save on a mortgage, check out fool.com/mortgages, where you can compare rates and get in contact with certified lenders. You can even download our free mortgage guide, "5 Tips to Increase Your Credit Score Over 800."
