For years, everyone that has ever thought about purchasing or refinancing a home has had this question and gone to great lengths to avoid the “monster” called mortgage insurance, or, sometimes referred to as PMI (private mortgage insurance). However, in today’s housing market where we have all experienced declining home values, mortgage insurance has become commonplace and necessary to allow homeowners and potential homeowners to obtain financing for a new home or refinance their existing loan with the very low interest rates that are being currently offered. Mortgage insurance is a default insurance for the lender, and unfortunately, the lender passes this charge on to the homeowner. Standard lending guidelines dictate that a lender’s maximum exposure in any loan cannot be more than 80%. With mortgage insurance placed on the loan, the lender is protected and thus, is willing to lend as much as 100% of the market value or purchase price of the home, depending on the specific loan product. The lender is willing to go the higher loan to value on the home because the mortgage insurance provider pays any loss to the lender in excess of 80% of the home’s value. There are multiple options for homeowners today in the mortgage insurance market so let’s take a look at the basic types offered and the types of loans these options are combined with:

Conventional Financing:  Conventional financing requires mortgage insurance for any loan amount that exceeds 80% of the current fair market value of your home or the purchase price of a home, whichever is less. There are 2 types of conventional mortgage insurance. The first type, and, until recently, the most common is monthly mortgage insurance. The cost of the mortgage insurance is calculated according to how much over the standard 80% loan to value you are borrowing. The cost increases in 5% loan to value increments (meaning there is a scale for 80-85%, a scale for 85.01-90%, and so on). The cost is calculated and there is an additional monthly premium for the mortgage insurance added to your monthly mortgage payment. The second type, and one that is increasing in popularity is the single-premium mortgage insurance policy. This type of coverage is also based on a 5% increment scale similar to the monthly mortgage insurance. However, the cost of this type coverage is paid all at once (by either adding it to your loan amount or you paying it all up front). The single premium mortgage insurance is gaining popularity because it always results in a lower total monthly payment to the homeowner. However, you want to review both options for the type that is going to work best for you. If you are going to be in the home for a short period of time (say 1-3 years), you may be better off paying the monthly premium versus the one-time premium. Simply add up the amount you will spend monthly until the time you sell or refinance and compare it to the cost of the single premium and see which is better for your situation. Your mortgage lender can assist you in this comparison. The monthly premium option will automatically drop off of your payment when the principal balance of your loan reaches 78% of the original amount borrowed.

Government Financing:  Mortgage insurance is required on all FHA insured loans. The major difference between the FHA mortgage insurance and conventional mortgage insurance is FHA requires both an up- front charge of 1% of the amount you are borrowing, as well as a monthly charge added to your payment. The amount of the charge also depends on the loan to value as well as the number of years you are financing the home for. The monthly charge for FHA mortgage insurance automatically drops off of your monthly payment when the loan amount reaches 78% of the original amount borrowed.

While I am not, and should not be considered a tax advisor by any means, there have been tax deductibility changes for mortgage insurance in recent years that were not available in the past. Basically, if your adjusted gross income is less than $ 100,000 per year, a portion, if not all, of the mortgage insurance you pay could be tax deductible. In the past, this was not the case. Consult your tax advisor for the tax guidelines and rules for this deductibility.

In theory, no one wants to pay mortgage insurance, but it does give all homeowners additional flexibility and the availability of mortgage borrowing in excess of 80% of the value of your home. FHA mortgage insurance also opens up financing options and gives homeowners who have less than stellar credit the opportunity to become a homeowner or refinance their existing home at much better rates and terms. Use it to your advantage, but be sure to take the time to have all of the different types of mortgage insurance available explained to you and make your lender show you in writing a comparison between them so you can pick the option that works best for you and your family.

Many customers that I speak to concentrate heavily on getting the lowest interest rate possible in the market today, and completely ignore what they are actually paying to get that rate. We all want the lowest rate possible, but you must always factor in the closing costs you are having to pay or finance in the loan to tell if this lower rate is the best option for you.

2 most important questions to ask yourself:...

Did you know that the most important factor in choosing the right loan is NOT always the interest rate ??

Many customers that I speak to concentrate heavily on getting the lowest interest rate possible in the market today, and completely ignore what they are actually paying to get that rate. We all want the lowest rate possible, but you must always factor in the closing costs you are having to pay or finance in the loan to tell if this lower rate is the best option for you.

2 most important questions to ask yourself:

How long am I going to be in the home ?
How many years will I actually keep this loan before selling, refinancing, or paying off the loan?

Take a look at this example:

Loan amount:  $ 150,000
Term:              30 years Fixed
Today’s Rate:    4.875% with -0- points and -0- origination
Monthly Payment:  $ 793.81

OR

Loan amount:  $ 151,500 (Financing the 1% discount point)
Term:              30 years fixed
Today’s rate:    4.625% with 1 point and -0- origination
Monthly Payment:  $ 778.92

In the above scenario a 1% origination fee costs you (or adds to your loan) $ 1500.00.  The difference in the payment between the 4.875% rate and the 4.625% rate equals $ 14.89. If you took the lower rate, you paid $1500 to save $ 14.89 per month. That means you would have to keep the loan for at least 101 months (divide the cost ($1500) by the savings ($ 14.89)) for you to break even on what you paid. Statistics show that the average homeowner keeps their mortgage loan for 3-5 years.

Don’t let a smooth talking salesperson claiming to have the lowest rate in town COST YOU MONEY !! Always consider ALL of the terms of the loan when comparing which offer is going to be best for you. The length of time you are going to keep the loan (before selling, refinancing, etc) is THE most important factor in deciding which type of loan is best for you and your family.

Above and beyond interest rates and closing costs, there are 3 much more serious factors that EVERY homeowner needs to take into consideration:

Guaranty Trust is trying to get valuable information out to all homeowners who are contemplating a refinance and are not sure if now is the right time. We have all heard that when you inquire about a refinance, you should try to reduce your interest rate by 1-1.5% for it to be financially prudent.  This is no longer the case. Because of new lending standards and guidelines put into effect by the Federal Government, closing costs on refinance loans are MUCH LESS than what they used to be. The result is that you are able to recoup the closing costs in a much shorter time period, thus, you do not need as much of an interest rate reduction to make it worthwhile.

Above and beyond interest rates and closing costs, there are 3 much more serious factors that EVERY homeowner needs to take into consideration:

(1) All loan programs are based on the value of your home at the present time. We are very concerned about the impending guideline changes that our Federal Government is planning on implementing because these changes will LOWER the amount of money you can borrow against your home’s value at the time you refinance. They are seriously considering lowering the loan to values to 80-85%, which will eliminate the customer’s ability to get a loan because home values are continuing to decline. Customer’s that are in “less favorable financing”, (ARM loans, interest only loans, etc) will be stuck in these loans because their home will not appraise high enough in the future to be able to refinance them. Click here to calculate your current LTV.

(2) FHA loans: The government raised the cost of the monthly mortgage insurance charge for both 15 and 30 year term loans on April 18th. It is reasonable to believe that these premiums could continue to rise. FHA is also, just like conventional, weighing their options for decreasing the loan to value ratios.

(3) Freddie Mac (FHLMC) Relief and DU REFI PLUS (FNMA) loans: These are loan programs that were created to help homeowners whose loans are owned by these entities be able to refinance through a streamlined process (sometimes without an appraisal). FNMA and FHLMC do not directly service loans. Lenders such as Bank of America, Chase Manhattan, Wells Fargo, etc. simply service these loans for FNMA and FHLMC. You may have a loan owned by FNMA and FHLMC and not even know it (find out here: FNMA, FHLMC). The Freddie Mac relief program was discontinued May 10, 2011. This is the FHLMC equivalent of the FNMA DU REFI PLUS. We suspect announcement is forthcoming soon regarding the termination of the DU REFI PLUS program. FNMA and FHLMC are separate entities, however, their guidelines and procedures mirror each other, and both are under the control of the Federal Government. If you have a loan that is owned by FNMA, a refinance now could save you thousands of dollars (or even avoid a declination of your application) later. Both of the aforementioned programs were designed to help homeowners with little or no equity left in their homes refinance into better rates and terms.

If you are in a loan that is at an interest rate of more than 5.5%, or if you are wanting to refinance to a loan with a shorter term (ie: 15 years), please take the above into consideration. These guideline changes are going to leave a lot of homeowners stuck in their current loans because home values are still declining and the guideline restrictions that are being implemented (reducing the amount of money you can borrow against your home) will prohibit you from qualifying for a refinance in years to come, or, at the very least, make it a whole lot more expensive because you will have to utilize PMI (private mortgage insurance) to be able to qualify.