Mortgage Insurance PMI/MIP
STOP!!! FIRE!! WOLF!
I apologize for the drama but this section to many borrowers is the single decision that can literally same you THOUSANDS. I am not talking about saving $20 or even $50 per month over 30 years. Don’t get me wrong any money in your pocket vs. the bank is a good thing! See the rate section for more on this and there is no reason you can’t get both but what I see over and over is a borrower so focused on rate to save a few bucks and end up paying Thousands more than they need too. Your payments are more impactful in the beginning years and we are talking about possibly hundreds per month off your PITI payment! This WOLF is real and it goes by the name MORTGAGE INSURANCE!!!
Remember that prior we said it is all about RISK. The risk of the bank lending money to you! The other side is collateral… The house… So let’s say you are that “A” or even “B” borrower. The bank likes your stuff… Good credit and income but you want to put less than 20% down. The bank considers 20% down as a minimum down payment!!
I thought 20% down was a strong down payment? It is, but it is the minimum for not having to buy expensive insurance to protect the bank because you do not have enough equity in the property to satisfy the risk assessment of the Bank.
They have my house to cover their risk? The bank does not want your house. If you stop making payments the bank will try to work with you and let’s say that fails and it goes 6 months before they foreclose. (PITI of $1,500 x 6 = $9,000). The bank will need to pay foreclosure cost ($6,000). They will need to hire a Realtor to sell the property ( $12,000) They may have carrying cost, fix up, fees, penalty’s etc. ($3,000) That’s a quick $30,000 in addition to your outstanding loan that it will cost the bank to break even foreclosing on your house. If there is not $30,000 equity the bank has a loss! What if the market drops and your home value dropped? Very risky in the bank’s eyes.
What is this Mortgage Insurance then? Depending on the type of loan it goes by many names and takes many forms. It sort of hangs in the shadows and is sort of downplayed by the Bank/Lender. OK, maybe that sounds a little criptic. Mortgage Insurance protects the Bank or Lender if you default! The problem is you never even knew you had options, you just end up with whatever the bank gives you while your looking and asking questions about the rate and the APR, etc.. Mortgage Insurance is actually a good thing! If it did not exist we would all have to put 20% down.
How long do I have to pay MI? Generally coverage is provided until the loan is at 78% LTV based on the original loan. You may however attempt to have it removed if you can prove 20% equity either through pre-payment, Appreciation or increase in value through remodeling or maybe an addition.
Who are these PMI Companies?There is really only a handful of Companies that most of the Lenders use: MGIC, RMIC, Radian, Genworth, United Guaranty, PMI and a few others. Most lenders have a contract or relationship with a few MI Companies and each of these companies have their own products and pricing. The MI Companies to their defence actually give seminars and have information available but somehow it rarely gets to the consumer. Another issue is Banks/Lenders may vary even when they have the same MI company as to which products they will allow and how they may be structured. You may also find that some Loan Officers choose not to offer options even when available through the Bank.
How can we find out what the Lender offers? Ask questions. A knowledgeable “Broker” is a huge advantage, a Broker has the ability to shop not only your rate but also will know which Lenders have MI products favorable to your situation and be able to guide you to the best options at the right Lender.
So what are the options? That’s a great question! Let’s break them down and take a look at the good, the bad and the ugly of Mortgage Insurance products. BPMI/monthly is the most common form offered on a conventional loan. (it is also one of the most expensive)
LPMI/BPMI singles: Lender Paid Mortgage Insurance (LPMI), Buyer Paid Mortgage Insurance Singles (BPMI singles). There are a lot of variables in how these work and sometimes what they are even called. The one you want to ask about are the single premium MI’s… These can be paid by you, seller assist, YSP or Lender Credit and can in some cases be financed into the loan amount but you usually want to avoid the Lenders or options that add it to the Rate. When it is paid in the rate it will be for the full term of the loan!! The chart will show a comparison of products and MI programs. (it looks worse than it is… go slow) Notice the MONTHLY PMI column for BPMI. If you divide the monthly amount into the single premium (1 time cost) you will see how many months it will take to break even.
The chart is for illustration purpose and does not show all options. We recommend talking with a seasoned loan officer like those here at Norstar to run specific scenarios:
There is also another option to completely avoid Mortgage insurance. check it out here