What is mortgage insurance and how does it work?

    Mortgage insurance lowers the risk to the lender of making a loan to the buyer that is putting less than 20% down. To Offset the risk, lenders require these borrowers to pay mortgage insurance.

    Different Types of Mortgage Insurance

    There are two types of mortgage insurance: private mortgage insurance (PMI) and mortgage insurance premiums paid to the government (MIP), which covers USDA loan borrowers and loans obtained through the FHA.

    What is Private Mortgage Insurance?

    Private mortgage insurance is a policy that protects your lender if you fall behind on your mortgage payments or end up in foreclosure. The amount a borrower pays for insurance premiums differ based on the buyer’s insurance provider, personal credit score and size of down payment. It’s important to note that PMI shouldn’t be confused with homeowner’s insurance, which is a separate insurance policy homebuyers purchase to protect themselves from the high costs of home damages.

    Compare the three options below:

    Scenario: $600,000 sales price, 10% down, credit score of 740, SFR, 30 day rate lock

    CONVENTIONAL

    Lender paid mortgage insurance

    CONVENTIONAL

    Borrower paid mortgage insurance

    FHA
    Interest Rate* 4.375% 4.125% 3.625%
    Points Charged 0 0 0
    Principal & Interest $2696.15 $2617.11 $2505.77**
    Mortgage Insurance Included in interest rate $108 $360
    When can Mortgage Insurance be cancelled? No- included in the mortgage rate. Benefit is that the total mortgage payment is lower compared to separate mortgage insurance option. Yes- see restrictions below.

     

    When putting down 10% or more on a FHA, MIP is terminated after 11 years. MIP is for life of loan if putting down less than 10%.

    *example above does not include homeowner’s insurance, property taxes and HOA dues. Interest rates and fees are subject to change until locked in. Based on pricing available 4/19/2019.

    **FHA option includes the upfront mortgage insurance financed into the loan amount. (1.75%)

    When can mortgage insurance be terminated?

    The Homeowner’s Protection Act of 1998

    The law covers various residential mortgages, including refinances, signed on or after July 29, 1999, and it establishes the rules for an automatic termination of PMI and/or a borrower cancellation. However, this does not apply to the government insured FHA or VA mortgage loans as well as those loans where the lender paid for the private mortgage insurance.

    When the borrower‘s home reaches around 22% equity, automatic termination of PMI takes place, according to the Act. The borrower cannot be considered “high risk” for default and all mortgage payments must remain current. In the event that the borrower has poor payment history or has placed liens on their property, PMI can continue. The lender can go into specifics about this, so be certain to ask. It should also be noted that the 22% equity rule uses the original appraised value or purchase price (whichever is less). It usually takes about 72/73 payments to reach this.

    One of the provisions of the Act is that all borrowers with PMI have to be informed yearly about the laws of PMI termination or cancellation. The mortgage servicers must give borrowers a telephone number where they can call for information in regards to private mortgage insurance termination or cancellation, and lenders are also obligated to inform borrowers not covered under this Act about their rights regarding termination or cancellation of PMI.

    Once a borrower reaches the 20% equity amount of their home’s value, they can ask to cancel their private mortgage insurance, no matter when they signed the loan. It is also a possibility to cancel PMI if the borrower can prove that their home’s value has increased, but typically, lenders have a two-year waiting period before this can happen. This option is not a guaranty. Most borrower’s would need to refinance into a new loan to eliminate mortgage insurance if they feel equity is enough to reach a loan-to-value of 80% or less. Always ask your lender questions regarding PMI.

    I have access to some of the lowest mortgage insurance rates available. If you are working with a client who is putting less than 20% down, please let me know and I can save them money!

    Call Sarah direct if you have any questions!

     

    SARAH MENCHACA

    Southern California Funding, Inc.

    Direct: (949)378-3718

    Mortgage Loan Officer

    DRE #01923836

    NMLS ID #981148

    Specializing in conforming*, jumbo, FHA*, VA* hard money and alternative documents loans

    *Clear to close in 15 days!

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