Clearing the MIst on Mortgage Insurance

Mortgage Insurance

Now that I’ve touched on the topic of down payments when purchasing a home, let’s talk about mortgage insurance, or as it’s commonly called – MI.  Mortgage insurance can be likened to a nasty but necessary villain in a movie – you hate them but they do play a vital role in the whole process of events.  The same thing goes for mortgage insurance, without it many would find it impossible to buy a home.  A lot of times, buyers searching the internet may forget to figure MI into their monthly payment projection, which could spell panic when they receive a loan estimate from an actual lending company.  So, let’s clear up the mystery that is mortgage insurance.

All programs, with the exception of VA, require some form of mortgage insurance if your loan-to-value (LTV) is over 80%.  This is because statistical data shows homeowners who have less than 20% equity in their homes are more likely to default on their mortgage in the event of financial hardship.  This is seen as a potential risk to lenders and their investors.  While MI can add a considerable chunk to monthly mortgage payments, it still allows buyers to purchase homes with as little as 3%-5% down depending on the loan program they are pursuing.  Back in the early 2000s before the mortgage and housing crisis, buyers were able to bypass mortgage insurance, by taking out a 2nd trust deed (2nd TD) for the remaining 20% of the home’s sales price.  Unfortunately, these 2nd TDs were usually at considerably higher rates with riskier terms that affected the overall monthly payment in the long run.  So, in reality MI is not such a bad guy.  He’s also not a superhero by any means, but he can save the day when you don’t have 20% to put down on the purchase of your home.  So let’s take a look at the different sides of MI.

Conventional loans use Private Mortgage Insurance (PMI) provided by a third party insurer.  Rates for PMI will vary based on the loan amount, the loan-to-value (LTV), credit score, and the term in years.  PMI can be paid for upfront at closing or financed into the loan.  Borrowers can apply to their mortgage holder to remove MI once their LTV reaches 80%, and once the LTV reaches 78% the MI should automatically be canceled from the loan by the loan servicer.

FHA loans use Mortgage Insurance Premiums (MIP) backed by the federal government.  While FHA interest rates tend to be better than Conventional rates, keep in mind that unless the borrower is putting at least 10% down there will be mortgage insurance for the entire life of the loan.  MIP is canceled starting with year 12 if the home’s original LTV at financing is 90% or less.  There are two parts to MIP – the upfront mortgage insurance premium (UFMIP) and the monthly mortgage insurance premium.

UFMIP is calculated at 1.75% of the loan amount which you can either pay in full at closing or finance into your loan amount.   For example, on a $200,000 base loan amount UFMIP would be calculated as $200,000 x 1.75% = $3,500.  You could either pay this $3,500 in its entirety at closing or finance it into the life of your loan making your loan amount $203,500.  Note, financing the UFMIP into your loan will not figure into your home’s LTV.

The monthly mortgage insurance premium is calculated at 0.85% of the loan amount if your down payment is less than 5%.  So for example, the same $200,000 loan would be calculated as $200,000 x 0.85% = $1,700 / 12 months = $141.67 per month.  Although it’s a considerable amount to add to a monthly mortgage payment, it does allow buyers who have less money to put down to actually be able to purchase a home.

Usually, with FHA loans the only way to get out of mortgage insurance entirely is to refinance out of it into a Conventional loan once your LTV is 80% or below.

So now you know that MI is not such a bad thing after all, especially for buyers with limited funds to put down.  If you would like a clearer picture of what your monthly payment would look like with MI, contact me today for a free no-obligation consultation.  I’ll be happy to help you get into your next home!

© 2017 Marilyn Quindo

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