What is mortgage insurance and do I always have to get it if putting less than 20% down?

Asked by Tracy, Seattle, WA Mon Sep 17, 2007

My boyfriend and I have just reached an agreement to buy an 877 SF condo in Seattle and I am curious about mortgage insurance. We are putting 5% down, are first time home buyers, and should be closing on Oct 19. In our situation, do we have to pay this insurance no matter what? In our pre-approval application for our loan, the cost is estimated as $142 a month, which just seems outrageous to me. How is this payment calculated? Can it vary? How long do we have to pay it? What is it even for?

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Romeo Danais, , Nottingham, NH
Mon Sep 17, 2007
Fed Home Loan Bank regulations stipulate that a 'legal' loan can only be up to 80% of the purchase price or appraisal, 'Loan-to-Value' or LTV. Banks may exceed the 80% rule, however, some agency must 'insure' that the upper portion (that above the 80%) will be paid in the evnt of a default. The FHA and VA do this, allowing higher than 80% financing and there are private companies that also insure. Mortgage Guarranty Insurance Company (MGIC also known as Magic) was one of them. Typically MGIC is selling an insurance policy to the bank, of which you pay the premium. If you default on your risky (only 5% down payment as opposed to 20%) loan, the lender will be insured for the upper 15% of the loan, and takes responsibility for the remaining 80%.

Its a good thing. Without it, you wouldn't be owning a home, and for the minor cost of the insurance, you're doing very well. Once your LTV has dropped below 80% either by your paying down the loan to the 80% LTV level, or your house has increased in value so much that your 95% loan is now a 79% loan, then you can apply to the bank to drop the insurance policy as the LTV has dropped to less than the 80% threshhold.
1 vote
J Lo, Home Buyer, California Glory, Brentwood, CA
Mon Sep 17, 2007
If you look at the overall picture - take the PMI and multiply it by the number of payments - it is outrageous. That is why it behooves the owner to watch their "principal balance".

Once you get close to the 20% mark- start talking to the lender to see specific steps to remove this charge. Keep in mind - you are not the beneficiary.

This is a misconception sometimes and cannot be reiterated enough.

Before you close - you might want to have them give you exact detail on the terms. Please don't leave it to chance - and yes, your premium is in keeping with today's numbers.
1 vote
Debt Free Da…, , 85260
Mon Nov 26, 2007
No, there are plenty of Lender Paid Mortgage Insurance options out their now. You could also just stick with the classic 80/20, 80/15 model.
Web Reference:  http://GetPrequalified.com
0 votes
Lynn Roberts…, Agent, Seattle, WA
Sat Nov 3, 2007
Hi Tracy,

Many mortgages with 5% down do require MI (Mortgage Insurance) but there are a few ways around it. It's true that a couple of months ago loans were being pulled off the market quickly, especially those that had favored buyers with less then 20% down. However, those loans are coming back and by doing an 80/15/5 (First note is 80%, second is 15%, buyer puts down 5%) you can avoid MI altogether. I recently had a buyer qualified by two different lenders doing an 80/20 and no MI. In fact, we are in contract now.

However, if you find for some reason that you don't qualify for those programs, you can sometimes prepay MI and avoid paying it on a monthly bases. I sold a home about 2 months ago and we asked the seller to pay $3000 in buyers prepaids which we used to prepay the MI, saving a few hundred dollars a month for the buyer.

Prepaying the MI isn't always the best deal, however. You can determine which is best, prepaying or paying on a monthly basis, by taking the MI and multiplying it by 24 (2 years) and seeing which is less. I use 2 years because that is the mark that most recently has been used by lenders for removing the MI from the loan. As Ute noted below, the lender will not necessarily remove the MI on their own, you will have to apply for removal and jump through a few hoops to get it done, but it will be well worth it!

Good luck to you, and congratulations.
0 votes
Silvia Miceli, Agent, Toms River, NJ
Mon Sep 17, 2007
Mortgage insurance on transactions with less than 20% down was usually the norm on conventional mortgages. During this time, when there is a crisis in the mortgage industry, more then ever they are looking to make the best loans they can. Please keep in mind that mortgage insurance unlike the principal loan amount does not get paid for the term of the loan. Once the principal balance goes under the 80% amount. It stops. As always, I would ask your lender to verify. Also, ask about pre-payment penalties on your loan up front. Good Luck!
0 votes
Patrick J. T…, , Charleston S.C.
Mon Sep 17, 2007

That is a great question. The answer is maybe. You are not required to put down twenty percent to eliminate mortgage insurance. What you need is down payment money and an appraisal that can equal the twenty percent. Sometimes you can even do it with only equity but it is getting more difficult in the last few months.

Goos Luck.
0 votes
Samuel Hilbe…, , Woodinville, WA
Mon Sep 17, 2007
Tracy -

Honestly, your lender should be walking you through all of this and helping to explain the purpose of mortgage insurance, etc.

This does sound fairly typical and it is good to see that you looked into the details very well. Make sure you discuss all of your concerns and questions with your lender. And, don't be afraid to talk to a couple different lenders.

Here in Seattle, you have a lot of options and my biggest concern when dealing with any lender is lack of communication. I try my hardest to only work with lenders who communicate and explain the situation completely....especially to first time home buyers as you need to be sure of what you are getting involved with. If you do not feel that your lender is communicating well with you, make sure that you are careful and understand everything happening.

Congrats on your coming new home! I love the Seattle condo market and you made a wise investment =)!
Web Reference:  http://www.agentsamuel.com
0 votes
Ute Ferdig, Agent, Newcastle, CA
Mon Sep 17, 2007
A few more things I forgot to mention. Mortgage insurance is to insure the lender in the event you default on the loan. It's basically a risk management tool. If you only pay 5% down, the risk that the lender will not be able to sell the property for what is owed on the loan is quite high. $142/month sounds about standard. Typically, you have to pay until you can show that you have at least 20% in equity in the property. PMI does not go away automatically. You have to submit an application and the lender will then send someone to the property to do what's called an interior broker price opinion (BPO). They may even get more than one of the BPOs to arrive at a value. If the BPO(s) come back showing that you have at least 20% in equity, the lender will most likely agree to remove the PMI. Since you only put down 5% right now, it will probably take a while in the current market before you can ask for the PMI to be removed. You can also remove it by refinancing later, but it's impossible to say at this time whether that will be a viable option for you in the near future.
Web Reference:  http://www.go2kw.com
0 votes
Ute Ferdig, Agent, Newcastle, CA
Mon Sep 17, 2007
Mortgage insurance is required when the loan amount of the first was more than 80% of the value of the property. In the past, buyers got around having to pay mortgage insurance by getting a 80% first and a second up to 20% if they did 100% financing. However, in the current mortgage market, this option has probably become less available. You really need to discuss your options with a mortgage professional. I also know that there have been some changes as far as tax deductibility. In the past, PMI was not tax deductible at all. I believe that this has changed, but I don't know if it's always tax deductible. There may be some restrictions and you should check with a tax professional. Good luck.
0 votes
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