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Mortgage Insurance

Mortgage Insurance is required if you finance more than 80% of the home purchase price. (*)



MI is actually a requirement by the government - to both private lenders (Conventional) as well as FHA (Government) backed mortgage loans - in order to safeguard financial sector when you obtain a mortgage loan with a down payment which is less than the threshold generally considered “safe.”

The insurance will cover the lender's loss should borrower default on the mortgage loan.

That threshold is by and large accepted at 80% of the purchase price or the appraised value whichever is lower.

(*) It is important to note that if the appraised value is lower than the purchase price; lenders will NOT make the loan unless price is reduce to an amount equal to or lower than the purchase price.

In other words the top 20 to 25% is the part commonly viewed as risky.

In the practical sense if a borrower defaults, it is easier for lenders to sell the property for 80% of the original value – so that insurance of 20% of the home purchase price will weighs heavily on lenders decision on weather or not to commit to that loan. (Please read more detailed information below)

There are two types of loans that will require MI: FHA mortgage loans as well as private lenders providing “conventional mortgage loans” will require such insurance to make the loan.

The purpose in any cases is the same: Give the lender a way to recover losses in case borrower defaults on the loan.

On the other hand with insurance in place lenders are more willing to finance homes and consequently more people can afford to buy their homes.

NOTE: VA loans do NOT require insurance and they do NOT allow MI to be charged: Even if the veteran purchase a home with 0% down payment.

Great news to the women and men who dedicate their service for this country!


Clearing Up The “Acronyms” Confusion

1) PMI – Private Mortgage Insurance

2) FHA - charges two types of insurance to back their loans:

(a) UFMPI (Up Front Mortgage Premium Insurance) FHA charges that can be paid for cash at closing or some of it can be added to the loan

(b) MMI (Mutual Mortgage Insurance Fund)- Then comes the mortgage insurance premium that is charge until 78% of the loan is paid off or for a minimum of 5 years – whichever comes later

Beginning with fiscal year 2010, all funds for FHA systems development are appropriated under the Mutual Mortgage Insurance Fund (MMI for short).

FHA was and still is intend to be self supported and – NOT tax financed: This insurance program is the backbone of the FHA single-family program: The Section 203(b) program, enacted in the National Housing Act of 1934, provides mortgage insurance for the purchase or refinancing of one - to four- family residences

3) MIP – Mortgage Insurance Premium: FHA came up with this one which I think that is very appropriate because does not matter what it is called what you pay is an insurance premium that will give the lenders some insurance that their money will be made whole in case of borrower’s default.

4) MI – Mortgage Insurance – as I expressed above regardless the name (or acronym) everything boils down to an insurance that aims to protect the lenders in case of borrower’s default."

I simply call it for what it is – "mortgage insurance."

But be mindful of all acronyms discussed here.


The Insurance Premium

A) Private Mortgage Insurance


Private mortgage insurance (PMI) – insures only 20 to 25% considered the range at risk.
These are sometimes called conventional guaranteed mortgages and they are traditionally lower cost than those insured by FHA.

The Mortgage Guarantee Insurance Corporation first made PMI popular however nowadays there many other insurance companies issuing private mortgage insurance which helps to keep the cost down.


PMI rates are generally quoted at two levels:

  • The “90% loan” for any amounts financed between 80 to 90% of value/purchase price this type carries lower percentage premium
  • The “95% loan” for amounts between 90 and 95% of value/purchase price - higher premium

You have three choices to pay your PMI:

  • you can pay it in full at closing OR(*)
  • partial payment at closing with balance paid in monthly installments along with the mortgage payments - paying the whole amount in monthly installments

(*) Please notice: that contrary to FHA loans, PMI has just one fee. FHA has two.

Canceling Private Mortgage Insurance: Differently from FHA loans (discussed below) acelerated payments are proptly accepted cancel the premium as well as it is more likely that market appreciation will be taken in consideration


B) FHA Mortgage Insurance

For a long time shun as being expensive, FHA loans now enjoys an increasing popularity both with lenders because it covers the 100% of the loan (contrary to what we saw on PMI above) and the buyers – especially first time buyers – because FHA would endorse loans with as little as 3.5% down payment

In turn, you need to pay a higher fee to receive a FHA loan.


FHA collects its insurance premium in two ways:


I) You will pay an upfront fee (UFMPI) - UFMPI can be paid cash at closing or some of it can be added to the loan

II)
Plus you will pay a premium every year (Please see MMI above) - that amount is calculated and then divided up by twelve and that portion is paid monthly along with your mortgage payment

You will pay it every year for at least five consecutive years or until your mortgage payments come to 78% of your original borrowed amount - whichever comes later


TIP: If have paid your FHA mortgage loan to your credit scores are “good” or “very good” please run some numbers and consider refinancing to replace it by a conventional loan


Mortgage Insurance Allows Low 3.5% Down Payment

Conventional mortgage loans can be obtained with a down payment between 10% to 20%. When your down payment is lower than 20% your lender will ask for a PMI.

FHA mortgage loans on the other hand will allow borrowers to attain a loan with a very low down payment – as low as 3.5% - and, in some extreme circumstances, even lower than that.


I recently had a conversation with a mortgage consultant who told me that although FHA would sign on loans with less than 3.5% down, it is close to impossible to find an investor that would accept it. :- (


A good alternative is HomePath loans – however they only finance homes that they own …and those may not be exactly the kind of property you want or the area you would like to live on.


However here is my word of caution: charges of insurance premium – MI or PMI - will add to the borrowers’ costs.

MI applies to the amount of the loan only - NOT to the whole purchase price. So the higher your down payment the lower you MI amount.

FHA also has an upfront fee (UFMPI) which also adds to the cost of borrowing. Higher loan amounts carry higher UFMPI as well.

Then you will have to pay Annual MMI fees paid monthly as I presented above. It will be kept in place until such time that you have paid the home enough to bring loan to value (LTV) below the threshold of 80%...

Actually FHA will accept that you be eligible to lift your MI when you have down to 78% of amount financed or LTV - but NOT before 5 years from the issuance of the loan.

However they will not accept any accelerated payments or take any value appreciation into the mix for 30 years fix mortgages.


Cancelling Mortgage Insurance

MI is non-cancelable by the insurer – which means policy issuer has to continue to renew it at the same rate when the loan was first issued - unless there has been non-payment.

Lender must notify mortgage insurance company if loan is in default for continuous four months MI is an expense that you must eliminate ASAP.

MI can be cancelled when you’ve paid 20% of a conventional loan or 22% or 5 years of
FHA backed mortgage.

Payments of this 20 to 22% portion of the loan can be accomplished in three ways (or a combination of the three):

1)
During the course of your normal monthly payment the portion that goes towards the “principal” will come to a point that you have reached that amount

2) Accelerated payment: You pay more towards the principal in the course of your scheduled payments

3) Market value of the property goes up + the additional payments you have made to the principal.


How do you know when you have paid 22% of your loan?

How do you know for sure that you came to that import moment in the history of you loan?


In years that real estate price are going up, lenders would be willing to order an appraisal to determine if the home has gone up in value.


Naturally during these trying times that we have been living for the last few years, the home prices have been sluggish at best…


However, in any circumstances, there is one sure way to know when you have paid 22% of the original loan: look at the “mortgage payment statements” that you receive every month:

  • It will tell that last month’s payment has been received and credited properly;
  • How much of it went towards the principal;
  • How much was paid in interest
  • AND finally it will tell you how of the original loan you still owe. Just keep watching it and you will know the exact moment you are free of Mortgage Insurance!

    Congratulations! It’s time to have it cancelled!



JC Fagundes, RE Agent |SERVICE. EXPERIENCE. EXCELLENCE.


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