Tuesday, February 15, 2011

Mortgage Insurance

What is Mortgage Insurance (MI)?

• Mortgage insurance is an insurance policy that is required on loans that are for amounts greater than 80% of the value of the property (or the sales price, whichever is lower)
• The borrower pays for the insurance policy
• The lender is the beneficiary of the policy if the borrower goes into foreclosure

How are MI Rates Determined?

Conventional loans – MI rates depend on a number of things
–Size of the loan
–Borrower’s credit score
–Down payment amount
–Property location
–Terms of the loan (30 years, 15 years, etc.)

FHA loans – MI rates only depend on the down payment and terms of the loan

What is PMI?

• PMI stands for Private Mortgage Insurance, and is mortgage insurance from a private company
• PMI is only used with conventional loans
• FHA loans have mortgage insurance, but it is paid to the federal government. There is no private mortgage insurance company involved. It is referred to as MI, not PMI.

When Does MI Go Away?

Conventional loans
• Automatically goes away when the borrower has 22% equity in the property, based on the purchase price
• The borrower can get it removed earlier if they can prove that they have 20% equity in the property – requires an appraisal
• Most lenders require MI to be paid for at least 1 year, regardless of the equity

FHA loans
• Automatically goes away when the borrower has 22% equity in the property, based on the purchase price
• MI must be paid for 5 years, regardless of the equity in the property
• Borrower cannot get the MI removed early by proving they have sufficient equity

Lender-Paid MI

• Some lenders offer loans that are advertized as not requiring mortgage insurance
• They really do have MI, but the lender is buying it themselves, usually without telling the borrower
• Interest rates are higher for “no MI” loans
• Overall payment might be lower, but the payment never goes down, regardless of the equity the borrower has in the property

Things to Consider

• FHA loans require an up-front MI payment of 1% of the loan amount – can be added to the loan – not required to be paid in cash
• If a borrower gets two loans and neither one is greater than 80% of the purchase price, there is no MI
–Example: $100,000 purchase price, one loan for $80,000, a second loan for $10,000, and a $10,000 down payment = no MI
• VA loans never require mortgage insurance!

Want to watch our video of this tip? Check it out on our web site by clicking here.

Want to make sure your loan closes? Call the Mortgage Experts at 303-345-3683.

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