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Mortgage Insurance, friend or foe?

C Spaker
Christopher Spaker, AMP
President, CNB Mortgage Company
[email protected]
(585) 385-2370 x50955

 Mortgage insurance (MI) has gotten a bad rap over the years. People spend an awful lot of time and effort trying to avoid paying mortgage insurance. But is MI really as bad as everybody thinks? Before we answer that question, it may help to first understand what MI is all about. Mortgage Insurance covers the mortgage lender against loss caused by a mortgagor's default. It may cover all or part of the loss and it may or may not relieve any liability on the borrower’s part if default on the mortgage occurs.

MI plays an important role in the mortgage industry by protecting a lender against loss if a borrower defaults on a loan and by enabling borrowers with less cash to have greater access to homeownership. With this type of insurance, it is possible for you to buy a home with as little as a 3 percent to 5 percent down payment. This means that you can buy a home sooner without waiting years to accumulate a large down payment.

There are many different loan programs available and different loan types refer to MI differently. Some loan programs have different requirements for the amount of coverage needed, but it essentially serves the same purpose. It helps protect the lender. Not all loans require mortgage insurance however, and the premium varies depending on certain criteria.

On a Conventional mortgage when a borrower’s down payment is less than 20% for an owner-occupied property, MI is typically required. The premium may be paid annually, monthly or as a single premium. The premiums are based on the amount and terms of the loan and may vary according to the loan-to-value, type of loan, term of loan and the amount of coverage required by the lender. The less money the borrower puts down the higher the premium. MI may be cancelled once the loan to value reaches 80% or less of the appraised value of the property.

FHA loans have a Mortgage Insurance Premium (MIP) and regardless of the down payment, FHA requires a onetime upfront fee of 1.50% of the loan amount which may be financed into the loan. In addition to the upfront premium, there is an annual premium of .50% of the unpaid balance of the loan which is paid monthly as part of the total mortgage payment. The monthly mortgage insurance premium may not be waived regardless of the loan to value.

VA loans are guaranteed by the Veterans Administration (VA) and the lender is required to collect an up-front one-time fee at closing called the "Funding Fee". This amount is between .50% and 3.00% of the loan amount depending upon the status of the Veteran and if the Veteran has used his VA benefits previously to purchase a home. There is no monthly premium and there is no refund of the Funding Fee when the loan-to-value is reduced below 80% or if the loan is paid off early.

A federal law, the Homeowners Protection Act of 1998, affects many loans originated after July 29, 1999. The law ensures that your MI will be cancelled when you have reached a certain level of equity in your home. This means two things to you; your lender must inform you, both at the time of closing and annually, about your right to request the cancellation of MI and your lender may be required to automatically cancel MI at a certain point if you have not already requested that it be dropped.

When your mortgage balance reaches 80% of your home's original appraised value, your lender must cancel the MI at your request if you are current on your mortgage payments, have no other loans on the house and satisfy any lender requirements confirming that your property value has not declined. When your mortgage balance reaches 78% of your home's original value, your lender will automatically cancel the MI if you are current on your mortgage payments.

So now what do you think; is MI a friend or foe? From a lender’s perspective, it’s obviously a friend. And considering that MI allows you to purchase a home with very little cash up-front, the consumer should consider MI a friend as well.