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.
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.
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."
The Motley Fool has a disclosure policy.
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