Part One of this series on mortgage insurance explored several aspects of MI: its evolution, how it works, and some of its benefits. Part Two focuses on the various forms of MI as well as one of the more widely known alternative mortgage programs and the challenges with each.

TYPES OF MI AND THE ALTERNATIVES

Mortgage insurance can be found in several forms and uses. Understanding the different types of MI and related alternatives will allow you to make an educated decision on what will work best for your loan in your situation.

Standard Monthly MI –With this option, the cost of the insurance is calculated on a monthly basis and shown as part of the total monthly mortgage payment. This is the most common form of mortgage insurance. The cost varies widely based on the borrower’s credit, the percentage of down payment, and the type of loan program.

UFMIP and UFPMI –Acronyms for “Up-Front Mortgage Insurance Premium” or “Up-Front Private Mortgage Insurance,” UFMIP and UFPMI involve a single MI premium purchased at the beginning of the loan. Designed to reduce the monthly costs associated with monthly MI, insurance of this nature is either financed into the loan amount or paid up front as part of the borrower’s closing costs. This type of insurance is found in both conventional (UFPMI) and FHA (UFMIP) mortgage programs. FHA mortgages use a combination of reduced UFMIP and reduced monthly MI.

LPMI –The newest form of mortgage insurance, LPMI stands for Lender Paid Mortgage Insurance. Wait a second. The borrower pays mortgage insurance, right? Although this new form of MI is referred to as “lender paid,” there is still a cost to the borrower. The lender typically increases the mortgage interest rate and uses the proceeds to pay the premium. This new type of coverage can often be more cost effective than standard monthly MI.

Hybrid Loan Programs (“Combo” or “Piggyback” Financing) –This mortgage option combines two mortgages as a way to avoid mortgage insurance. As you’ll recall from Part One of this series, mortgage insurance is required for borrowers who put down less than 20%. Conversely, hybrid financing includes a first mortgage for 80% of the total loan amount and then uses a second mortgage for the remaining financing the borrower needs. This type of mortgage program became popular in recent years when interest rates were at an all-time low. Now that rates have increased, single-insured loans are once again becoming a viable option for many borrowers.

THE CHALLENGES

Owning a home is often considered to be The American Dream. Dreams often are filled with emotions. The emotion of owning a home can be so strong that affordability and budget principles are ignored. Regardless of loan type, borrowers must think about their short- and long-term financial situation and properly plan, because new homeowners can easily get in over their heads, with catastrophic results.

In the case of mortgage insurance, the biggest challenge for many borrowers is simply the cost. The homeowner pays the cost associated with this protection, and it can be substantial based upon the level of risk, ranging from $91 to $162 per month for 100% financing loan programs*. Also, as mentioned in Part One, until 2007, the cost of mortgage insurance was a nondeductible expense, so even though MI is tax deductible on loans originated in 2007, if the government reverts to the old law in 2008, the new tax benefit will no longer exist. 

Where hybrid/combo loans are concerned, selecting this loan option eliminates the opportunity to get a second mortgage in the future, because the second lien position is already taken and must be paid in full before another loan can be issued. Plus, the interest rate on the second mortgage is typically variable, which in today’s mortgage market is not a good thing. The rates on second mortgages are currently high, and many borrowers are seeing their once-affordable mortgage payments increase to levels they can’t sustain.

MI SUMMARY

Mortgage insurance has a long history of helping people realize the dream of homeownership. It can be costly, however, causing many consumers to seek other mortgage alternatives to reduce or eliminate this type of insurance. Remember, this is insurance designed to protect the lender in the event of default on the loan by the borrower. Then again, having this insurance is what makes lenders comfortable enough to open their guidelines and take on the increased risk of a mortgage with a loan to value greater than 80%. 

The best advice, with all the different and sometimes riskier financing options out there, is that it is imperative that your mortgage provider show you a cost breakdown for each item, giving you the ability to choose the one most advantageous for your personal mortgage and real estate plans.
 

Davey Edwards and Eric Kincheloe are certified mortgage planning specialists and managers for Primary Residential Mortgage Inc, in South Glastonbury, Connecticut. They can be reached at Davey@prmine.com and Eric@prmine.com or at 860-430-1845.
 

* $91to $162 based on FannieMae MyCommunityMortgage loan program or Flexible 100 Mortgage.

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