What is MI?
If your down payment is less than 20%, there is mortgage insurance. Most often, this is paid via a monthly fee, but you can also choose to pay it as an upfront lump sum, or half lump sum with a lower monthly fee. Another option is lender-paid MI where you take a higher interest rate in exchange for not having the fee.
MI protects the lender in case you default on your loan. In a moment, I will explain a new advantage for you, the home buyer.
How Long Does MI Last?
With a conventional loan, when you have 20% equity, you can ask your mortgage lender to drop the MI. Most FHA loans require MI for the life of the loan. If you have an FHA loan with enough equity, it can make sense to refinance into a conventional loan to get rid of the MI — especially if you can lower your interest rate and/or loan term at the same time.
Using MI as a Tax Deduction
If your adjusted gross income is not over $100,000, you may deduct all of the MI premium.
If your adjusted gross income is $100,000.01 to $110,000, then deductions are phased out at 10% increments for each additional $1,000 of adjusted gross household income.
A Silver Lining to MI: A Perk for Home Buyers!
One reason a lot of folks dislike MI is that it protects the lender, not them. (Although to be fair, MI enables you to buy a house with a small down payment.)
Now, there is an additional advantage! Some lenders — including myself — can offer you protection in case of job loss along with MI. This particular program will pay six months’ mortgage payments, up to $1,500/mo, if you are out of work. This is a lot of peace of mind, knowing that your mortgage won’t slide into default while you are between jobs. And even if $1,500 isn’t enough to cover your entire payment, it will go a long way toward making your payment so that your emergency savings account doesn’t tap out so quickly.
There is no payback whatsoever. Up to $9,000 will be paid toward your mortgage if you are out of work. It is not a loan; it is a true insurance benefit. This feature is for the first two years of home ownership.
Now that I’ve mentioned being a licensed loan officer, I am required to state my NMLS license number, which is 1284134. (CA, WA) Employed by Envoy Mortgage, a full service mortgage lender.
Private mortgage insurance (PMI) is a monthly charge added to your payment when you take a
conventional loan with less than 20 percent down. The purpose is to protect the lender in case you default on your mortgage.
PMI is not a scam. It enables people to buy a home without having a large down payment. This, in turn, promotes home ownership, real estate wealth through leveraging, better quality neighborhoods, and greater stability in the U.S. economy. Because of PMI, you can get more house for your money.
Even still, you want to stop paying this extra charge as soon as possible. Here’s how it works.
With a conventional loan, you can stop paying the monthly PMI when either:
1) You notify the lender that you have 20 percent equity and then the lender verifies it by ordering an appraisal. You cannot order your own appraisal, because that would open the door to possible bias. However, you do pay for the appraisal, so you want to be certain of the value and your equity.
2) Your PMI will be automatically dropped when you have 22 percent equity with your loan balance being at 78 percent of purchase price. This law (enacted for loans funded after
July 1999) prevents lenders from collecting PMI long after the risk factor has been reduced. However, with real estate values rising in many areas, you want to keep a look-out for what similar homes in your neighborhood are selling for. That way, you can stop the PMI payments sooner.
FHA Has MI, not PMI.
With an FHA loan, you take mortgage insurance, not private mortgage insurance. The rate is calculated differently, and MI remains for the life of the loan, regardless of equity, if your down payment was less than 10 percent. With less than 10 percent down, the only way to eliminate MI on an FHA loan is to refinance into a conventional loan. If you were one of the rare individuals who took an FHA loan with 10 percent or more down payment, then MI can be dropped after 11 years.
Should You Refinance to Drop MI or PMI?
If you can drop MI or even PMI and lower your term and/or interest rate at the same time, then refinancing probably makes good financial sense. However, you need to look at both your new monthly payment and your loan term in order to make that determination.
If you are in California or Washington state and would like me to take a look at your situation to see whether or not refinancing is a good move, send me an email via my Ask a Question page or contact me using the info below.
Carolyn Warren, NMLS # 1284134, (206) 919-4542
FHA (Federal Housing Administration) is a government sponsored enterprise that provides money to banks and mortgage lenders. This price increase comes from FHA; therefore, it doesn’t matter which lender you choose, the price increase is now set by federal banking law.
Change #1: Begins April 1, 2013
For all FHA loans with a down payment less than 5% down, the monthly mortgage insurance fee (MI) has increased. Fortunately, it is a small increase of 0.1%. Previously, the monthly MI was calculated at 1.25% of your principal and interest payment. Now it is 1.35%.
This small increase to all home buyers will add up to a lot more profit for FHA, who has been struggling since the mortgage meltdown to be profitable.
Most home buyers taking an FHA loan are putting down 3.5%. That is the #1 attraction to the FHA loan. If you have 5% to put down, you’re going to want to take the conventional loan instead. The only reason a person with 5% to put down would take the FHA loan rather than the conventional loan is if their credit could not qualify for conventional. FHA is more generous with credit requirements.
If your FHA loan hasn’t closed yet, but your loan officer got the FHA case number prior to today, April 1st, then your MI will be at the lower rate of 1.25%.
Change #2: Begins June 3, 2013
This is the biggest and worst change. For a 30-year fixed rate with less than 10% down, FHA will collect the monthly MI payment for the life of the loan.
This means you do not get to cancel the MI fee when you have 22% equity. You could have 90% equity and you will still be paying that pesky MI fee that protects the lender in case you default on the loan.
Setting You Up to Refinance
If you take an FHA loan, it’s like you’re being set up to refinance when you have sufficient equity (and credit) to get into a conventional loan. The problem with refinancing is that there is a cost to getting a new loan and you have to start all over again at the 30-year mark (unless you take a shorter term loan).
If the FHA loan is the only one you can qualify for, then it’s better than missing out on becoming a home owner and acquiring more personal wealth through real estate ownership. However, since you will probably want to refinance or sell in the not-so-distant future, your focus needs to be on paying the lowest lender fees possible.
There are still a lot of needless junk fees being charged today. This is one reason I offer my Cost Estimate/Good Faith Estimate review and consultation service. Just last week, I saved a home buyer $751 in lender fees through this service. So please, do your proper shop-and-compare before committing to any certain lender. And then, if you are buying with the FHA loan, you can be confident you know the rules and are getting the best deal you possibly can.