We’re halfway through April, and Orion’s brokers continue to help a large number of first-time homebuyers, which often includes borrowers with low down payments and high loan-to-value ratios. These loans usually require mortgage insurance (MI). But what is that? Is it something that is mandatory for purchasing property or just the property you’re buying or refinancing? And with the changes and Fannie Mae and Freddie Mac, is private mortgage insurance even worth thinking about?
Orion’s brokers know that MI is not mandatory, or tied to the property. Mortgage insurance defrays some, perhaps all, of the cost to a lender if a loan goes into default and foreclosure. Depending on the loan type and initial loan-to-value (LTV) of the mortgage, every lender will require certain amount of coverage from MI. And when Orion can lower the risk, the better the pricing will be!
For FHA mortgages the full amount of the mortgage is covered and all mortgages require two forms of insurance premium be paid, an upfront premium that is added to the loan amount and a monthly mortgage premium. All new FHA mortgages require the monthly premium be paid for the life of the loan.
For Fannie Mae and Freddie Mac’s conventional mortgages, despite both of them shrinking their footprints and lessening their risk, private mortgage insurance (PMI) is required on all mortgages that have a loan to value greater than 80% of the property’s value. This is for all conforming mortgages, regardless of refinance or purchase, condo, or single family detached home.
For PMI, the rate varies on the LTV of the mortgage: The higher the LTV, i.e. the lower your equity or down payment on a purchase, the higher the coverage required by the lender and therefore your mortgage insurance premium. The greater coverage required for your mortgage the higher your PMI premium will be.
There are different types of mortgage insurance premiums Orion makes available for most conventional transactions. A monthly mortgage insurance premium is the standard PMI payment that many are most familiar with: Your client pays the premium every month as part of their mortgage payment. The advantage of the monthly payment is your client can petition to eliminate the payment in the future when their loan to value is below 80%.
There is a single premium mortgage insurance premium where instead of making a monthly payment for PMI, your client can pay a single premium at closing, either in cash or as is most frequently done finance the premium on top of your mortgage. Since most people who must have PMI as part of their mortgage are a bit short on cash this type of premium is almost always financed. By adding the premium to your client’s mortgage you are helping them spread the payment out over a 30-year amortization schedule.
Brokers are often asked about the premium on “Lender Paid Mortgage Insurance.” It is basically a single payment premium, but instead of the premium being paid by you upfront through financing, the premium is paid by Orion through a higher interest rate. The advantage is depending on rates the total monthly payment could be lower than the monthly premium, as well since your client is paying the premium via a higher interest rate, they may have a higher mortgage interest deduction on their income tax returns. The disadvantage is they have the higher interest rate for the life of the loan regardless of future loan to value.
Your Orion AE will work with you on figuring out which is the best premium for your client. It very much depends on the situation, how long your client intends to keep the home, debt-to-income qualifying ratios, and most importantly, which type of premium they are most comfortable paying. Helping your customers is what brokers do best!