What is Mortgage Insurance?

One of the most asked questions, especially from 1st time homebuyers, concerns mortgage insurance. Typically buyers want to understand what it is, exactly, why they need it, and do they have to pay it for the entire term of their home loan.question1

So… what exactly is mortgage insurance, aka private mortgage insurance or PMI?
PMI is insurance that protects the mortgage lender against default on the note by the borrower. As the borrower, you pay the PMI premium, and your lender is the beneficiary of the policy ensuring that if you stop paying your mortgage, the lender is paid by the insurance company.

Who needs PMI?
You do, if your down payment is less than 20 percent of the appraised value or sale price, you will be required to buy mortgage insurance

How much does it add to your payment each month?
Well that varies depending on the size of your down payment, the loan amount, your credit score and the loan program, but you can generally figure on paying between .4% and 1.5% of the loan amount annually.  To determine the monthly amount, divide that number by 12.

How long do you have to pay for PMI?
This answer, once again, varies. It depends on how your mortgage is worded, and some lenders offer programs that allow you to pay the entire insurance premium in a lump sum at closing. But generally if you have a conventional mortgage, you’ll pay for a minimum of the first year of your loan. Once you pay down the balance of your mortgage below 80% of the original purchase price or value, and you’re current on payments, you can request that your lender remove the insurance. You will generally need to have your home re-appraised, which in some cases a change in value will help you meet the equity requirement and get your PMI removed. Once your equity ratio reaches 78% as scheduled, the HPA act requires lenders to remove your PMI under specific rules. FHA loans require you to pay mortgage insurance for at least the first five years, and in order to have it removed, your loan balance must be down to 80% of the original purchase price or value – a new appraisal will not be accepted.

How can you avoid taking out PMI?

Well there are some options, if you qualify or can manage it. Veteran can apply for VA loans, which has no private mortgage insurance. USDA loans have mortgage insurance but at reduced rates.  Another option… put down more than 20% as a down payment. Sometimes taking a higher interest rate will eliminate the PMI requirement (lender paid PMI), just do the math to figure out if this option will help your bottom line payment each month. See if you’ll qualify for a combination loan (80/10/10) which includes an 80% first mortgage, 10% down payment, and 10% as a second mortgage. Some banks or lenders offer special loans for certain occupations which may not require PMI. It doesn’t ever hurt to ask!

Bottom line, what’s in it for me?

PMI enables borrowers with less cash to have a greater opportunity to buy a home. Because of PMI, you could potentially purchase a home with as little as a 3-5% down payment.

The Homeowners Protection Act of 1998, or “PMI Cancellation Act”, signed into law by President Bill Clinton protects homeowners rights with regards to mortgage insurance – you can read more about the law here – http://www.federalreserve.gov/boarddocs/caletters/2004/0405/CA04-5Attach1.pdf

The Mortgage Guys welcome your questions regarding your Atlanta home purchase, home mortgage, or refinance. Contact us today!

 

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George Beylouny is a licensed loan originator and the Branch Manager for Silverton Mortgage Vinings.  He can be reached at 678-428-6514, George@mgatl.com or  www.mortgageguysatlanta.com

 

Understanding the FHA Mortgage Insurance Premium (MIP)

* Disclaimer – all information in this article is accurate as of the date this article was written *

The FHA Mortgage Insurance Premium is an important part of every FHA loan.

There are actually two types of Mortgage Insurance Premiums associated with FHA loans:

1.  Up Front Mortgage Insurance Premium (UFMIP) – financed into the total loan amount at the initial time of funding

2.  Monthly Mortgage Insurance Premium – paid monthly along with Principal, Interest, Taxes and Insurance

Conventional loans that are higher than 80% Loan-to-Value also require mortgage insurance, but at a relatively higher rate than FHA Mortgage Insurance Premiums.

Mortgage Insurance is a very important part of every FHA loan since a loan that only requires a 3.5% down payment is generally viewed by lenders as a risky proposition.

Without FHA around to insure the lender against a loss if a default occurs, high LTV loan programs such as FHA would not exist.

Calculating FHA Mortgage Insurance Premiums:

Up Front Mortgage Insurance Premium (UFMIP)

UFMIP varies based on the term of the loan and Loan-to-Value.

For most FHA loans, the UFMIP is equal to 2.25%  of the Base FHA Loan amount (effective April 5, 2010).

For Example:

>> If John purchases a home for $100,000 with 3.5% down, his base FHA loan amount would be $96,500

>> The UFMIP of 2.25% is multiplied by $96,500, equaling $2,171

>> This amount is added to the base loan, for a total FHA loan of $98,671

Monthly Mortgage Insurance (MMI):

  • Equal to .55% of the loan amount divided by 12 – when the Loan-to-Value is greater than 95% and the term is greater than 15 years
  • Equal to .50% of the loan amount divided by 12 – when the Loan-to-Value is less than or equal to 95%, and the term is greater than 15 years
  • Equal to .25% of the loan amount divided by 12 – when the Loan-to-Value is between 80% – 90%, and the term is greater than 15 years
  • No MMI when the loan to value is less than 90% on a 15 year term

The Monthly Mortgage Insurance Premium is not a permanent part of the loan, and it will drop off over time.

For mortgages with terms greater than 15 years, the MMI will be canceled when the Loan-to-Value reaches 78%, as long as the borrower has been making payments for at least 5 years.

For mortgages with terms 15 years or less and a Loan -to-Value loan to value ratios 90% or greater, the MMI will be canceled when the loan to value reaches 78%.  *There is not a 5 year requirement like there is for longer term loans.

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Why Do I Need To Pay A VA Funding Fee?

The VA Funding Fee is an essential component of the VA home loan program, and is a requirement of any Veteran taking advantage of this zero down payment government loan program.

This fee ranges from 1.25% to 3.3% of the loan amount, depending upon the circumstances.

On a $150,000 loan that’s an additional $1,875 to almost $5,000 in cost just for the benefit of using the VA home loan.

The good news is that the VA allows borrowers to finance this cost into the home loan without having to include it as part of the closing costs.

For buyers using their VA loan guarantee for the first time on a zero down loan, the Funding Fee would be 2.15%.

For example, on a $150,000 loan amount, the VA Funding Fee could total $3,225, which would increase the monthly mortgage payment by $18 if it were financed into the new loan.

So basically, the incremental increase to a monthly payment is not very much if you choose to finance the Funding Fee.

Historical Trivia:

Under VA’s founding law in 1944 there was no Funding Fee; the guaranty VA offered lenders was limited to 50 percent of the loan, not to exceed $2,000; loans were limited to a maximum 20 years, and the interest rate was capped at 4 percent.

The VA loan was originally designed to be readjustment aid to returning veterans from WWII and they had 2 years from the war’s official end before their eligibility expired. The program was meant to help them catch up for the lost years they sacrificed.

However, the program has obviously evolved to a long term housing benefit for veterans.

The first Funding Fee was ½% and was enacted in 1966 for the sole purpose of building a reserve fund for defaults. This remained in place only until 1970. The Funding Fee of ½% was re-instituted in 1982 and has been in place ever since.

The Amount Of Funding Fee A Borrower Pays Depends On:

  • The type of transaction (refinance versus purchase)
  • Amount of equity
  • Whether this is the first use or subsequent use of the borrower’s VA loan benefit
  • Whether you are/were regular military or Reserve or National Guard

*Disabled veterans are exempt from paying a Funding Fee

The table of Funding Fees can be accessed via VA’s website – CLICK HERE

The main reason for a Veteran to select the VA home loan instead of another program is due to the zero down payment feature.

However, if the Veteran plans on making a 20% or more down payment, the VA loan might not be the best choice because a conventional loan would have a similar interest rate, but without the Funding Fee expense.

The best way to view the VA Funding Fee is that it is a small cost to pay for the benefit of not needing to part with thousands of dollars in down payment.

* Disclaimer – all information is accurate as of the time this article was written *

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