10 Mortgage Insurance Questions Part 2

Mortgage Insurance Questions (Part 2)
3) Why do I need Mortgage Insurance? 4) How much does Mortgage Insurance cost? 5) How can I cancel Mortgage Insurance? 6) When can I cancel Mortgage Insurance? 7) Who are the major Mortgage Insurance companies? 8) Does every bank require Mortgage Insurance? 9) What changes have occurred in the Mortgage Insurance industry since the financial collapse of 2008? 10) Does the federal or state government(s) require Mortgage Insurance on government mortgages such as Fannie Mae, Freddie Mac and SONYMA?

Why do I need Mortgage Insurance?
If you are borrowing more than 80% of the value of the house that you are buying or refinancing, chances are you need Mortgage Insurance. Typically, lenders do not like to make loans on house for more than 80% of the value of the property. Lenders consider these loans to be too risky. In order to lower the risk to levels that are acceptable to a lender, the lender will require the borrower to obtain Mortgage Insurance to “insure” the lender against losses for the amount of the loan that exceeds the 80% loan to value threshold. The best way to avoid the requirement for Mortgage Insurance is to save or otherwise obtain enough funds to make a down payment of at least 20% of the value of the property. Another way to avoid paying for mortgage insurance is to obtain a subordinate loan in order to make up the difference between the amount of your down payment and the 20% required by lenders. Subordinate loans are loans made by a lender that the borrower must repay. If the borrower does not make the required payments and the subordinate lender forecloses on the property, they are only repaid after the primary lender is repaid in full. Due to the increased risk inherent in subordinate loans, they tend to be very expensive and, in most cases, more expensive than the cost of Mortgage Insurance. In addition, the higher cost of subordinate loans will remain with the borrower for the entire life of the loan whereas Mortgage Insurance premiums can be removed after a period of time. One exception to the higher cost of a subordinate loan is if the subordinate loan is made by a family member with sufficient resources and desire to assist the borrower. In many cases a “Rich Uncle” may make a loan with even better terms and costs than the primary loan. In any case, it never hurts to ask, so get out the old family phone book, and start looking for “Rich Uncles.”

How much does Mortgage Insurance cost?
Mortgage Insurance costs vary depending on the borrower’s income and credit profile as well as the amount of down payment. In addition, Mortgage Insurance laws vary from State to State and this may cause the rates to differ. Typically, a mortgage insurance premium (the amount of monthly payment you must make for Mortgage Insurance) is about ½ of 1% of the loan amount annually for a loan that is being made for 90% of the value of the property. This assumes a good credit rating score of at least 700. To calculate the monthly payment you would divide the annual premium by twelve. Lets look at a typical scenario. Lets say that Peter and Jane have just gotten married and are ready to purchase their first home. They have found the perfect home for $100,000 and have managed to save $10,000 for a down payment plus sufficient funds for closing costs. (The cost of attorney fees, title insurance and in some states, taxes. To avoid taxes, consider purchasing a house in a Republican dominated state as these states tend to have lower, or no purchase, transfer or mortgage taxes. New York and California have some of the highest closing costs in the nation due to onerous tax laws.) Since Peter and Jane do not have enough money to put down a 20% down payment, they will have to obtain Mortgage Insurance. Peter and Jane go to a mortgage lender who takes their application and runs a credit report. The credit report, along with a review of Peter and Jane’s income show the lender that Peter and Jane will qualify for the $90,000 mortgage loan with Mortgage Insurance. To calculate the Mortgage Insurance premium the lender takes $90,000 times the Mortgage Insurance premium factor of .0052 (about ½ of 1% of the loan amount). This yields an annual payment of 468. This number divided by twelve equals $39. What this means is that when Peter and Jane’s monthly mortgage payment is calculated it will include a $39 monthly payment for Mortgage Insurance.

How can I cancel Mortgage Insurance and when can I cancel Mortgage Insurance?
State laws govern the rules for canceling mortgage insurance on an existing mortgage loan. Most states require a lender to cancel Mortgage Insurance when the balance of the existing mortgage is repaid to an amount that is somewhere between 78 and 80% of the original value of the property. By original, they mean the value at the time that the loan was made. Some states require the lender to remove the mortgage insurance automatically when the loan reaches the required balance, while other states only require the removal of mortgage insurance when the required balance is reached and the borrower request the removal. It is in this case where a borrower may find a friend in a Democratic led state as these states tend to have very stringent and consumer friendly laws that make doing business as a lender tricky and difficult. Unfortunately for borrowers, the long term result of this “consumer friendly policy is higher overall costs for the borrower as lenders eventually pass the costs of doing business in these states on to the borrower in the form of higher interest rates. Another way to cancel Mortgage Insurance is to refinance your mortgage loan. If you feel that the value of your house has increased and the mortgage balance is now below 80% of the current value of the house, it may be more advantageous to refinance your mortgage with a new loan that does not have Mortgage Insurance. You should review the interest rate on your existing mortgage and the cost of Mortgage Insurance vs. the interest rate on the new loan without Mortgage Insurance. A rule of thumb is that you should be saving at least 1% in the interest rate if you are refinancing your mortgage, but the final decision should only be made after considering all of the costs of refinancing vs. the costs of your existing mortgage.

Who are the major Mortgage Insurance companies?
In 2008 the Mortgage Insurance industry was very crowded with many players in the Mortgage Insurance Industry. The economic crash of 2008 took its toll on the Mortgage Insurance Industry and there are only a few major players left today in the Mortgage Insurance industry. Two of the largest companies remaining today are Genworth Financial and MGIC. The companies can be found at Genowrth.com and MGIC.com . It should be noted that the Mortgage Insurance company that you will use for your mortgage loan will be chosen by the lender. The borrower does not have a say in the Mortgage Insurance company choice.

Does every bank require Mortgage Insurance?
Mortgage Insurance is not required by law and some banks and other lenders do not use Mortgage Insurance companies. These lenders choose to accept the additional risk associated with higher loan to value mortgage loans and they charge a higher rate of interest to offset the risk. The problem with lenders that have these lending programs is that the higher interest rates charged are usually more expensive than the cost of mortgage insurance on a loan with a lower interest rate. Large balance mortgage loans are typically not insurable by a Mortgage Insurance company and these loans are very popular with high income individuals who have not yet saved enough money to put down a 20% down payment. The primary borrower types for these mortgages are young urban professionals.

What changes have occurred in the Mortgage Insurance industry since the financial collapse of 2008?
When anyone looks at today’s Mortgage Insurance industry the first thing they notice is that “this is not your mother’s Mortgage Insurance industry.” Regulatory changes, along with the financial collapse of just about every Mortgage Insurance company in the industry have caused the Mortgage Insurance industry to radically change the way it does business. One major change is the removal of sub-prime and alt-a lending products as insurable loans. Up until the 2008 collapse, Mortgage Insurance companies would insure loans to borrower’s with poor credit and or questionable income. These loans were known as sub-prime. Mortgage Insurance companies also insured loans that did not have disclosed and verified income. These loans, known as alt-a loans were popular among self-employed people or people with irregular income streams. New regulations, including the Dodd-Frank federal regulations have made these types of loans no longer available.

Does the federal or state government(s) require Mortgage Insurance on government mortgages such as Fannie Mae, Freddie Mac and SONYMA?
The federal government purchases mortgage loans through its Fannie Mae and Freddie Mac mortgage companies. Up until 2008 these companies were privately owned but federally insured companies. When the mortgage industry collapsed the federal government took these two companies over and still controls them today. In addition to these two federally owned companies, many states have there own mortgage companies, such as SONYma in New York. Typically a government entity will not make a direct mortgage to a borrower. A lender such as a bank, or large mortgage company will make a direct mortgage loan to a borrower and sell the loan to the federally (or state) owned company. Today, as much as 85% or more of the mortgage loans made annually are sold to government entities. When a mortgage loan is made that would typically require Mortgage Insurance, the lender will check to make sure that the company being used is approved for sale to the government entity. Any Mortgage Insurance company that is not currently approved by Fannie Mae and Freddie Mac is probably not going to stay in business because there is not a large enough market for non-government owned mortgages.

Where should I start if I need a mortgage loan with Mortgage Insurance.
You started in the right place because you were smart enough to LookSeek. Now it is time to take this information and go shopping for a mortgage loan. Ask your lender the questions that you have learned from LookSeek and make sure you are getting a fair deal.