Mortgage Insurance: Is Your Bank Overcharging You
by Chelsey from Salt Lake City, Utah
Ask Kate if your bank charges too much for private mortgage insurance: Chelsey's lender tells her she has to pay $4100 for MI. Is that excessive? Numerous factors contribute to mortgage insurance charges. So that Chelsey (and you) know what to expect, I'll break it down in as simple of terms as possible, including differences between conventional and FHA mortgage insurance.
Is My Bank Charging Too Much for My Private Mortgage Insurance By Chelsey from Salt Lake City, Utah
I am currently trying to refinance my streamline mortgage.
I have an agent claiming there's a $4100 fee for the PMI premium plus the monthly PMI charge.
Is this normal across the board?
Ask Kate answers: Is My Bank Charging Excessively for My Private Mortgage Insurance
I'm not sure if you are asking about the cost of conventional or FHA mortgage insurance.
So, I'll include both but first let's discuss what mortgage insurance (MI) is and isn't.
MI is charged by lenders to reduce their risk when borrowers' down payments are less than 20% of the purchase price or appraised value, whichever is less. In general, the lower the down payment, the higher the premium.
So a common criticism of mortgage insurance is that borrowers pay it but lenders reap the benefit. However, to be fair, I should point out that MI does provide a benefit to home buyers who are not forced to wait until they have saved a 20% down payment to get financing.
But flipping the coin once again, lenders have compounded the criticism by making mortgage insurance difficult to remove, even after homes gain significant equity.
Lastly, do not confuse lender-required mortgage insurance with a third party insurance plan that pays off the home in the event of a wage earner's death.
Conventional Mortgage Insurance (PMI)
Conventional programs, such as home financing backed by Fannie Mae and Freddie Mac, usually call for the annual MI premium to be divided by 12 months and rolled into the house payment. For example, if a premium costs $2100 a year, $175 would be added to each monthly payment.
Another method of paying mortgage insurance that does not increase the monthly payment or negatively impact debt-to-income ratios is a one-time (usually several thousand dollars) lump-sum payment. Because there are no refunds, the single payment option can become very costly if the homeowner sells the home or refinances the mortgage during the first couple of years.
Yet another form of MI is lender paid mortgage insurance (LPMI). But as many discovered, what seemed a good idea during loan application, became an unexpected nightmare when HARP refinancing first began. That's as much time as I have now to touch on LPMI, so for more explanation, please go to...
- Refinancing an FHA Mortgage in Exchange for LPMI,
- When Lenders Mortgage Insurance Is Clear as Mud, and
- Predatory Lending Laws and Lender Paid MI.
FHA Mortgage Insurance (MIP)
FHA home loans are best known for embracing low down payments. But in return, homeowners pay a hefty amount of mortgage insurance, in two different forms.
First there is the upfront mortgage insurance which can be financed into the loan amount, and secondly, there's the annual mortgage insurance which is paid monthly. (Doesn't it make you wonder who at FHA thought annual described a monthly payment?)
Just like conventional MI, your loan-to-value will determine the amount of your FHA MI
, as well as the length of the loan, and the actual loan amount. (More on this later.)
Calculating Conventional Mortgage Insurance Cost
Whew. That was my short
introduction to MI, both conventional and FHA! Now onto your question which you probably think I have forgotten to answer!
How do you know if your loan originator is accurately disclosing the cost of your private mortgage insurance? If you are getting a conventional mortgage, look on your Good Faith Estimate
for the breakdown of the monthly payment.
Multiply the monthly MI by 12 months and add 2 more months for the cushion. Premiums are paid in advance which explains an amount that equals 12 months. Lenders are allowed to hold an extra 2 months in reserve as a cushion to compensate for rising premiums. That explains the extra 2 months. In your case, the sum should come to approximately $4100.
Next, ask your loan originator why the amount presently held in your current escrow account has not been applied as a reduction to the $4100. Depending on the answer, ask if the refund will be sent to you after the refinance closes. Find out the amount of the refund.
Now here's another plan of action. Request the name of the mortgage insurance company that issued your MI certificate, perform an internet search for their contact information, and call to verify the cost. (Be brave, you can do this.)
Calculating FHA Mortgage Insurance Cost
But let's assume you are applying for the FHA home loan. To see how the term of the loan, amount of the loan, and percentage of down payment determine the amount of annual mortgage insurance, go to FHA Streamline Refi Mortgage Insurance Premiums
and FHA Full Refi Mortgage Insurance Premiums
Compare the numbers to your Good Faith Estimate, using the same formula of 12 months and 2 months.
Again, you will want to ask how to get a credit for the current upfront MI. For more information, go to Does FHA Owe Me a Refund
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