How Can We Slash Mortgage Insurance Costs?
Private mortgage insurance companies are the private-sector equivalent of the VA and FHA. Such insurance allows individuals to borrow with little down — but only if they pay a premium for such coverage.
How It Works
Some important points about private mortgage insurance (MI) include:
- MI companies are state regulated, not federally regulated. State regulation is very tight.
- MI companies are monoline insurance firms — that is, they only provide mortgage insurance and not coverage for cars, boats, etc.
- MI companies have serious reserves — half of every premium dollar must be set aside for 10 years. And in years when claims rise, reserve requirements increase.
- The lower the borrower’s down payment the greater the amount of coverage required by lenders. For instance, with 5 percent down a mortgage insurer would provide coverage equal to 30 percent of the mortgage amount. With 10 percent down the MI company would insure 25 percent of the loan.
- When borrowers apply for a loan with little down, the loan application must be approved both by the lender and the MI company. It is possible to have a loan application approved by the lender but not the MI company, in which case the loan will not be originated.
- More coverage, of course, means higher premiums. Less coverage means lower premiums.
- MI premiums can be paid up front in a lump sum and the payment can be added to the loan amount. In some cases MI premiums may be refundable in part when a property is sold or refinanced. Premiums, however, are usually paid monthly.
- Mortgage insurance can generally be cancelled when the loan amount has been reduced to 78 percent of the original debt.
- Private mortgage insurance is routinely referred to as PMI. The right term is MI. Why? Because there’s actually a company named the PMI Mortgage Insurance Co.
Claims
When a borrower who bought with little down defaults, the lender looks toward the insurance company to cover the loss up to the coverage limit. The claim can include not only mortgage principal but also unpaid interest, the costs of maintaining the property and legal expenses.
Claim Advances
MI companies, like any insurance companies, want to hold down losses and claims. One way that MI companies reduce losses is with claim advance programs. With a claim advance the lender receives cash from the MI company to stop a foreclosure — this can be very useful for a borrower who has generally good credit but runs into a short-term financial problem. If you have MI coverage and face foreclosure, be sure to contact your MI company and ask if help with a claim advance is possible.
Second Look Programs
The MI industry also has what’s called a second look program. It gives borrowers an additional underwriting review if they’ve been turned down for a loan modification by certain lenders. Contact your MI company if you need more information.
How To Slash MI Costs
The are a number of strategies borrowers can you to reduce MI expenses.
First, ask your settlement provider if you can qualify for a re-issue rate. This is generally available when properties have been sold during the past five or ten years.
Second, buy with more down.
Third, if possible buy with at least 20 percent down. With 20 percent down lenders do not require MI coverage.
Resources
The Value of Mortgage Insurance. (An interesting — and readable — disucssion of MI issues).
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