Everyone knows that if you pre-pay your mortgage you can save a lot of money in interest and you will also build equity faster. Even though mortgage rates are low right now, they are still higher than what you can earn in a savings account. If you have a little extra money, then pre-paying your mortgage may be a better idea. Fairfax VA Real Estate is growing, so by pre-paying now you will have more equity in your home as the home prices increase.
One aspect of pre-paying your mortgage on FHA loans is that you can also benefit by eliminating the mortgage insurance premium. Here is an example: Let’s say you paid $175,000 with 3.5% down and you have a 4% FHA Loan, the mortgage insurance premium would be around $179. In this case it would take you 116 months (9 ½ years) to lower your principal enough to cancel the mortgage insurance premium. But if you pre-paid somewhere around $285 a month that would eliminate the mortgage insurance premium in 5 years.
During the 5 year that you are paying the $285 extra you would have paid $17,100 toward your principal which takes you to a point that you don’t have to pay mortgage insurance premium. If you did not pay that amount you would have paid $19,332 on the mortgage insurance premium. Total savings is $2,232 plus you would lower your payment or be able to retire the loan sooner if you kept paying the $285 extra.
On FHA mortgages of longer than 15 years the mortgage insurance premium can be cancelled with the loan-to-value (LTV) ratio of 78% after at least 5 years payments on the home. So if you do this, then on year 5 you can ask the mortgage company to appraise your home to see if you have reached the 78% of LTV ratio required to eliminate the mortgage insurance premium.
You can also refinance with a conventional loan if your LTV ratio is less than 80% to remove the mortgage insurance premium. Also remember that if Fairfax VA Real Estate keeps increasing in value that will also improve your loan to debt ratio.
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