Mortgage Insurance = Money for Nothing
I have been talking a lot with borrowers recently about avoiding Mortgage Insurance whenever possible. Even if you don’t have or don’t want to bring a large down payment, we can structure a loan that avoids it completely.
Mortgage Insurance is something that many people are paying each and every month, and don’t realize why it’s a bad idea for them. We will talk about that, but first we will talk about what it is.
Simply put, Mortgage Insurance is an insurance policy that you the borrower pay for to protect the lender in the event that you have a hardship and cannot continue to make payments on your mortgage. Lenders will require that borrowers carry Mortgage Insurance if they bring less than 20% of the purchase price as a down payment on their new home, unless you take out a FHA mortgage, where the borrower must carry Mortgage Insurance for the entire term of the loan, effective June 1, 2014. This is a shame since FHA mortgages were great for first time homebuyers because of the smaller down payment required, and more flexible underwriting terms. These are still the case, but the mortgage insurance is very expensive, and can limit the amount families can spend on their home since it is part of the monthly payment.
Types of Mortgage Insurance
Mortgage Insurance is referred by different names on different loan programs, but it’s still the same racket. Mortgage Insurance Premium (MIP) is used on FHA loans, Private Mortgage Insurance (PMI) is used on Conventional Loans. VA Loans have a Funding Fee, but it is a one-time premium collected at closing.
When is Mortgage Insurance Required?
As mentioned earlier.Conventional loans will have PMI if your down payment is less than 20 percent of the value of the home. Until your loan-to-value ratio (LTV) reaches 80% you can contact your lender about removing it, but lenders are only required to remove it one the LTV reaches 78%. Remember, FHA loans now require the monthly MIP to remain for the entire term, effective June 1, 2014.
What does Mortgage Insurance cost?
You’ll want to sit down for this. Conventional loans can have the PMI incorporated into your rate, or just added to the monthly payment. The premiums vary based on credit score and the Loan to Value (LTV), but can range from $30-$110 for each $100,000 borrowed.
On FHA loans there is Up Front Mortgage Insurance Premium (UFMIP) of 1.75% of the loan amount; yes, $1750 for each $100,000 borrowed. In addition, the monthly MIP is $1350 annually for each $100,000 borrowed. For some families an FHA loan is the best option at that time, but it should be refinanced ASAP when it’s possible to qualify for a Conventional loan.
Important Points
As if the above didn’t make you want to avoid Mortgage Insurance whenever possible, consider the following:
Having Mortgage Insurance makes it less likely to obtain a modification, or get approved for a short sale if you have a hardship.
Having Mortgage Insurance makes it more likely to get foreclosed on in the event of a hardship.
John Lyng is a Mortgage Loan Officer with Supreme Lending. He is experienced with traditional bank programs, as well as alternative programs to help people get into their home. John has a varied background in working with mortgage banks and non-profits, and believes in guiding families to prepare for affordable homeownership.
If you have questions about this or any mortgage-related topic, please contact John Lyng directly at 214-862-3579, or send an email to John.Lyng@SupremeLending.com.
