When Lenders Mortgage Insurance Is Clear as Mud
by Mike in Golden Valley, by Reddy in Glen Allen, and by Dan in Philadelphia
Ask Kate when lender's mortgage insurance is clear as mud to you! Wouldn't you like to know the real truth about mortgage insurance premiums, decisions, and requirements? Mike is sure many Americans are tricked into paying MI to reduce bank risk. Reddy wants to know about Borrower Paid Mortgage Insurance (BPMI) vs Lender Paid Mortgage Insurance (LPMI). Dan asks about lender's mortgage insurance cancellation on his investment property.
Question 1: PMI on Re-finance By Mike from Golden Valley, MN
Kate, On a loan-to-value of $175,000 and an interest rate of 5.25%, how much would the interest rate need to drop to make it worth refinancing?
I currently do not pay private mortgage insurance, but if I re-financed I would definitely need to pay PMI to decrease the banks risk.
I would never consider doing this unless it saved a significant amount of money and I'm sure many Americans are being tricked into re-financing only to pay PMI and not save anything on payments while decreasing the banks risk.
Ask Kate answers: PMI on Re-finance
You are so smart to note that adding PMI is primarily to reduce the bank's risk. Of course, I understand that paying mortgage insurance premiums makes refinancing or getting a new mortgage with less than 20% equity possible.
But when the cost grew prohibitive, the 80/20 piggy-back loans became popular, eliminating the need for mortgage insurance. Of course what followed was MI companies that began to fold and declare bankruptcy.
Enough history, let's talk about PMI and refinancing.
If you do not currently have PMI and can take advantage of refinancing through Making Home Affordable's HARP 2 plan, you will not need to have lender's mortgage insurance added to your payment, regardless of your loan-to-value.
Awesome, right? Go here to read more about the Making Home Affordable Refinance Program: HARP 2 Refinancing Guidelines
Then go to my mortgage payment calculator
. Play around with today's interest rates
until you know how low rates need to go to hit your bottom-line. I can tell you what I think is worthwhile but the amount is very subjective since motivation for refinancing
varies widely among homeowners!
Question 2: Borrower Paid Mortgage Insurance (BPMI) vs Lender Paid Mortgage Insurance (LPMI) By Reddy from Glen Allen, VA
Hi Kate, I brought a new home (closing date will be in February) and my credit score is above 570. I don't know what all the advantages and disadvantages between MI and LPMI. I'd really appreciate if you please suggest the best option. Thanks, Reddy
Ask Kate answers: Borrower Paid Mortgage Insurance vs Lender Paid Mortgage Insurance
Before Borrower Paid Mortgage Insurance premiums were tax deductible (see 2013 National Mortgage News: President Obama Signs American Taxpayer Relief Act
) some banks offered a higher interest rate in lieu of mortgage insurance. They claimed there was no mortgage insurance.
In fact, they had applied Lender Paid Mortgage Insurance. As a result, homeowners became agitated years later to discover that, regardless of increased real estate values, their interest rates did not decrease to compensate for no longer needing MI.
However, on the flip side, cancelling Borrower Paid Mortgage Insurance has rarely been a cakewalk
, in spite of increased equity.
To be safe, I'd keep in mind that getting rid of either type of mortgage insurance, BPMI or LPMI, might be difficult without refinancing at a later date.
To make an informed decision, ask for two Good Faith Estimates
, one with BPMI and the other with LPMI. Carefully compare both closing costs and payments. You should also ask for the mortgage insurance disclosures and read the fine print before deciding
Go here for more details: Borrower vs Lender Paid Mortgage Insurance
Question 3: Lender's Mortgage Insurance Cancellation on Investment Property By Dan M. from Philadelphia, PA
Kate, Does Homeowner Protection Act of 1999 apply on investment property mortgage? I know when I got the loan they said 80%. I am now at 78.7 as we speak. I called (Wells Fargo) to try and get it removed, they stated "the Investor requires 65%".
I probably should have prior gotten an appraisal which would be no problem as far as value ratio but since it's so close to 78%, it's probably cheaper at this point to fight with them. Appreciate any insight.
Ask Kate answers: Lender's Mortgage Insurance Cancellation on Investment Property
Hi Dan, The Homeowner's Protection Act (HPA) of 1998
which explains the rights of homeowners regarding mortgage insurance cancellation and termination
primarily pertains to residential mortgages obtained on or after July 29, 1999.
Keep in mind, lenders limit dwellings qualified for residential mortgages to single family or units no greater than 4 (duplex, triplex, 4-plex). Note there is no difference between the property being owner-occupied or an investment property (rented) when classified as residential.
However, The Homeowner's Protection Act (HPA) of 1998
defines residential mortgage transactions as
- Single family dwellings
- Primary residences
So sadly, you are not protected by the act because your property is not your primary residence. (And don't get me started on why I think this is wrong. I suppose - tongue-in-cheek - that residential investors building a nest-egg do not deserve mortgage insurance protection! Humph.)
Best wishes and don't cave in too easily to Wells on this,
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