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
Ask Kate when Lenders Mortgage Insurance Is Clear as Mud

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 at Get-Your-Best-Mortgage-Rate.com
Ask Kate answers: PMI on Re-finance

Hi Mike,

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!

Best wishes,

Ask Kate

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 at Get-Your-Best-Mortgage-Rate.com
Ask Kate answers: Borrower Paid Mortgage Insurance vs Lender Paid Mortgage Insurance

Hi Reddy,

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.

Best wishes,

Ask Kate

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 at Get-Your-Best-Mortgage-Rate.com
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
  1. Single family dwellings

  2. 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,

Ask Kate

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Lender Paid Mortgage Insurance
by: Annie from Seattle, WA

Hello, if you have LPMI and it results in a higher interest rate, in essence isn't the borrower really paying for the insurance? The reason I ask is because I think it should be a tax deduction. Any information you can lend would be appreciated.

Hi Annie, Kate here...

GREAT question! Yes, the borrower pays the mortgage insurance whether it is Borrower Paid Mortgage Insurance (BPMI) or Lender Paid Mortgage Insurance (LPMI).

The difference is that BPMI is a separate charge within the mortgage payment and therefore has the potential to be removed in the future.

However, LPMI is not a separate charge in the monthly house payment. Instead, it is included in the interest rate, as you point out, by increasing the rate. LPMI cannot be removed from the payment in spite of future equity.

Technically, LPMI should be tax deductible because the cost is reflected in the mortgage rate. But always consult your CPA for accurate and up-to-date IRS information because tax rules are complicated.

Best wishes, Kate

HARP 2.0 Refinance and Hidden Lender's Mortgage Insurance
by: Carl from San Diego, CA

Kate, I recently tried to refinance my mortgage through the HARP 2.0 program but I was told through my mortgage broker that my Fannie Mae status is 'qualified-disapproved' due to either tax-advantaged mortgage insurance or lender-paid mortgage insurance.

My mortgage broker could not identify which MI was part of my mortgage through Fannie Mae. I was not aware I had this built into my monthly mortgage payment and there is no break out to show that this insurance even exists. Since Fannie Mae states I'm qualified but disapproved because of the hidden MI is there a way to still refinance since my mortgage broker cannot find a way around this disapproval? I believe this is the only barrier I have to get to a successful refinance. Any help is greatly appreciated.

Hi Carl, Kate here...

For a select few (now don't you feel special?), the poorly disclosed lender's mortgage insurance mess has proven very costly. (Scroll up this page for my responses to several homeowners experiencing similar problems.)

If you feel inclined to contact an attorney, you could ask for your paperwork to be reviewed to see if it followed the disclosure laws for mortgage insurance.

Aside from that, you might find more leniency if you return to your current lender for your HARP transaction. But I understand that's like inviting the fox back into the hen house.

One more thought! Contact Fannie Mae directly and ask for a solution. It wouldn't cost you anything to try except a few minutes of your time. Here is how to contact Fannie Mae.

Best wishes, Kate,

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