For those of us who aren’t able to manifest tens of thousands of dollars for the down payment on a home, mortgage insurance is usually in the cards. When a buyer can’t afford a high enough down payment, mortgage insurance protects the lenders or investors from the possible default of a mortgage loan. Either the borrower or the lender can pay mortgage insurance premiums.
What Are the Different Types of Mortgage Insurance?
Mortgage insurance can be privately backed through insurance companies or government-backed through programs such as the increasingly popular Federal Housing Administration or FHA loans.
Private mortgage insurance (PMI), otherwise known as lenders mortgage insurance, is the most common type of mortgage insurance. If the down payment is less than 20 percent of the sales price or appraised value of a home, the buyer is usually responsible for paying mortgage insurance.
Factors Affecting Mortgage Insurance Rates
Mortgage insurance rates can vary widely. The main factors depend on the type of premium, how much of a down payment is made and, most recently, a borrower’s credit score. Many insurers are now offering credit-tiered mortgage insurance, where a better credit score equals better rates, according to Anny Havland, co-owner and licensed mortgage advisor at Neighborhood Mortgage in Bellingham, Wash.
Different mortgage insurance payment types are another reason rates may vary. The most common are where the borrower makes monthly payments. Others can be paid up front or in full, and others are lender-paid. Lender-paid loans are funded through a higher interest rate, which the borrower then pays. These are typically advertised as “No MI Required” loans, according to Havland.
How Can I End My Mortgage Insurance Payments?
There are various ways a borrower can end mortgage insurance payments. Sometimes they will end automatically when the loan value reaches 78 percent. Other times it may require the borrower to pay for an appraisal or a Broker Price Opinion (BPO), which is typically a real estate comparison. In that case it depends on the housing market in the borrower’s area. Other times, a borrower might choose to refinance, which would end mortgage insurance payments if the borrower refinances to less than 80 percent of the home’s value, according to Havland.
Federal Housing Administration Loans
FHA loans were created during the Great Depression to help lower- to middle-income buyers afford homes. With these loans the minimum down payment is 3.5 percent. The loans are provided though private lenders but are federally insured. A percentage of the loan, called a mortgage insurance premium, must be paid at closing, and is usually financed by the lender. There may also be a mortgage insurance payment, depending on the loan-to-value ratio. FHA loans occupied only 2 percent of the mortgage market in 2006, and grew to occupy more than 30 percent as of July 2011, according to Forbes. The subprime mortgage crisis is hugely responsible for the growth, according to Kenneth Alexander, a mortgage underwriter for Wells Fargo.
“Government loans were much harder to obtain because of all the rules, guidelines and restrictions involved. Now that conventional lenders have tightened their guidelines, more people are going through FHA if they’re eligible,” said Alexander.
Are “Piggyback Loans” Still Around?
The subprime mortgage crisis also influenced the use of “piggyback loans,” where a buyer could take out a second mortgage to avoid paying mortgage insurance. Although these once-common loans are still around, many lenders won’t offer them. The second mortgages that were taken out were the first to default during the housing crisis and it became a risk for banks to offer them. Also, due to a 2007 tax provision making mortgage insurance premiums tax deductable for borrowers with an annual income of $100,000 or less, it became cheaper for many borrowers to keep the mortgage insurance rather than try to get a Piggyback Loan, according to Dustin Brumley, a licensed mortgage advisor for Neighborhood Mortgage in Bellingham, Wash.