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The Full Story on Private Mortgage Insurance

Orange County, CA – Private mortgage insurance is a four letter word to most people. But there’s much more to it. If you’re able to invest 20% into a home then you don’t need to worry about mortgage insurance. However, for loans greater than 80% mortgage insurance is common. Mortgage insurance protects the investor in case a borrower defaults on the mortgage payments. Many homeowners can’t stomach the thought of paying it. They see it as a waste of money. But mortgage insurance brings many benefits to the industry both individually and collectively.

Let’s look at some of these benefits:

  1. Mortgage insurance enables more lenders to approve loans with lower down payments. Without the safety net of mortgage insurance lenders would be reluctant to take the risk of lending without a 20% down payment. A homeowner could seek a 2nd loan for the difference. Qualifying for a 2nd loan can be difficult and you can expect to pay a premium interest rate. So, mortgage insurance can fill that gap.
  2. Mortgage insurance helps homeowners buy homes sooner with as little 3% down. For many, saving 20% can be a very slow process. They may have stellar credit, consistent employment and strong income but lack the assets. By allowing lower down payments, mortgage insurance makes home ownership a reality sooner. In addition, mortgage insurance allows homeowners to buy the home that they want. Not just the home that they have 20% down for. A 20% down payment requirement would allow a person with $25,000 to buy a $125,000 home. With 5% down and mortgage insurance that same person could purchase a $500,000 home.
  3. You can get private mortgage insurance in high value home areas such as Orange County, CA. Government mortgage insurance, like FHA, is guaranteed. It’s also available on loan amounts up to the county limit. Currently that amount is $729,250 in Orange County, CA. But if HUD drops these amounts, like they have done in the past, then private insurance will still be available.
  4. FHA mortgage insurance can be very expensive. In fact, the rates just increased again last week. It’s important to compare private mortgage insurance with FHA mortgage insurance when qualifying for both programs. Private mortgage insurance can be considerably cheaper.
  5. Mortgage insurance is not permanent. It is not a cross that the homeowner must bear throughout the life of the loan. Mortgage insurance can be canceled by the homeowner after they have sufficient equity in their home.  According to Mortgage Insurance Companies of America (MICA), 90 percent of borrowers cancel their mortgage insurance within 60 months. When a homeowner feels their loan has reached 80% of the homes current value, they can get an appraisal and request the mortgage insurance be canceled. This can happen by paying down the loan and property appreciation. In addition, The Homeowner’s Protection Act (HPA) of 1998 added some consumer protection in regards to mortgage insurance. It requires lenders to inform borrowers about their right to cancel mortgage insurance and how to do it. It also requires lenders to cancel mortgage insurance automatically when it reaches a specific lever, typically 78%.
  6. Private mortgage insurance is offered on a variety of loan types. It can be structured in a variety of ways to help the homeowner meet their budget and goals. The flexible payment options and terms can be configured to meet the needs of most borrowers.

BORROWER PAID MIAs the title eludes to, this mortgage insurance is paid by the borrower.

  • Financed MI – Financed mortgage insurance allows the borrower to finance either all or a portion of the mortgage insurance premium into the loan amount.
  • Split Premium MI – This is a payment option that features lower monthly rates combined with an upfront premium due at closing.  The upfront premium may be financed into the loan amount.
  • Single Premium MI – This payment option provides mortgage insurance coverage until the loan amortizes to 78% of the original value, unless previously cancelled. This is paid in one lump sum.

LENDER PAID MI – This type of mortgage insurance is paid for by the lender.

Lender paid mortgage insurance (LPMI) has some great features. The borrower makes one monthly payment and there is no mortgage insurance premium to pay. It’s one loan and does not have a combo/piggyback 2nd loan. It’s available in single premium and monthly options.

Single premium and monthly MI paid with premium pricing has another benefit…additional tax deductability. In 2012 the government did not extend the law that allows homeowners to deduct mortgage insurance. This was a great benefit for many homeowners through 2011. With LPMI the mortgage insurance cost is factored into the interest rate. The borrower pays a slightly higher interest rate. Since mortgage interest is deductable but mortgage insurance is not, this creates a larger tax deduction.

How does this work?

  • The borrower pays a slightly higher interest rate.
  • Loan originator will price the borrower paid single premium MI and use the premium pricing to pay the MI premium.
  • Loan originator gives a lender credit on the closing fee sheet and HUD-1 settlement statement.
  • Borrower pays no monthly mortgage insurance payment.

The homeowner does not need to search for mortgage insurance separately. Your lender will apply to a variety of mortgage insurance companies that you qualify with. There is no additional documentation or work required by the borrower.

So stop thinkign of mortgage isnurance as a necessary evil. With out it, the real estate landscape would look a lot different. There would be fewer willing and capable buyers. Home prices and appreciation would decrease. It’s an option that opens the door for many new homewowners. And it can save homeowners thousands of dollars compared to the FHA option.

If you’re interested in reviewing mortgage insurance options and comparing plans, I would be happy to help. Please contact me.

Scott Storace

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