Sonoma County Home Loans: Mortgage Insurance 101

Mortgage Insurance is the dreaded monthly cost mortgage lenders put on borrowers looking to purchase or refinance with lower equity. Mortgage insurance, while it is an added cost, is not necessarily the evil it once was. While it is true, mortgage insurance does affect the total mortgage payment, the loan programs that contain monthly mortgage insurance are otherwise quite affordable.

If you are seeking a Sonoma County Home Loan, and you have less than 20% equity in your purchase or refinance transaction, you will more than likely need to have mortgage insurance built into your total monthly house payment. There is some ambiguity as to whether or not mortgage insurance is permanent or whether it can be removed. That depends on which home loan program you decide to go with.

If you have less than 20% down on your Sonoma County home loan, be prepared to pay mortgage insurance, at least for five years.

The the most common types of home loans available today; Conventional loans, FHA loans and USDA Loans all require mortgage insurance to be paid on a monthly basis. Most mortgage insurance home loan programs will require you to pay mortgage insurance for a minimum of five years.

For example if you are using FHA financing, you’ll have to have mortgage insurance in two forms. There is an upfront mortgage insurance premium of 1% and the monthly mortgage insurance premium is based on 1.25% of the loan amount. Unlike other loan programs, FHA loans require a minimum of 60 months of paid mortgage insurance premiums, and then at 20% equity the mortgage insurance can be removed.

Conventional home loans will also require mortgage insurance however the mortgage insurance premium on conventional financing is substantially lower than on FHA financing. USDA loans also have two forms of mortgage insurance similar to the FHA, although the cost of this type of financing is also lower than FHA.

Make no mistake, mortgage insurance on any Sonoma County Home Loan benefits the bank, period.

Mortgage Insurance while tax-deductible in most cases, is put on the loan as a risk-based premium, the lender benefits from in exchange for giving you a loan where there is less than 20% equity, purchase or refinance. Mortgage insurance loans contain a lower risk of default to the bank which is why they tack on that additional margin to be paid on a monthly basis until there is sufficient equity, risk tolerance to remove that risk.

Mortgage insurance Q & A on Sonoma County Home Loans

Q: Does paying monthly mortgage insurance make sense?

A: This depends on your equity or on a purchase transaction,the down payment amount. For example if you are a first time home buyer, and you don’t have 20% down, and are going with a mortgage insurance loan, that is not necessarily a bad thing because you can build equity over time especially if you consider making principal balance prepayments. However, mortgage insurance also reduces your purchasing power because of the additional debt that must be factored into qualifying ratios. Mortgage insurance can be a double-edged sword because on one hand it allows you to qualify for mortgage loan financing, while the same time reducing your purchasing power.

Q: FHA guidelines state mortgage insurance is automatically for 10 years, how can I get rid of it in five years?

A: This is accurate, the FHA states that mortgage insurance will be required for a minimum of 120 months. FHA loans require a down payment of 3.5%. That is only the minimum down payment required meaning, there is no limit to your down payment amount so long as it is 3.5% or more. Let’s say you put down 10% and you want to get rid of your FHA loan before 10 years. This means so long as your house value remains intact, you make extra principal prepayments of that additional 10% needed and after five years you can request to have your monthly mortgage insurance removed.

Q: Do I have to have mortgage insurance for the life of the loan if I’m looking at conventional financing?

A: No, not all no matter if it’s in the second, third or fourth year, once you have 20% equity, you can call up your current mortgage lender you’re making house payments to (the  servicier), and request that they remove the mortgage insurance. A 20% equity it is an elective for them to remove the mortgage insurance. This means the lender can decide to keep the mortgage insurance intact. At which point, you can choose to simply refinance the loan. At 22% equity, that is when the lender must remove the monthly mortgage insurance.

Q: Ok, so FHA loans and USDA Loans automatically require mortgage insurance, how is the interest rate affected?

A: Interestingly enough, both FHA loans and USDA loans are pricing slightly more competitively than conventional loans that do not require mortgage insurance. This has been the case over the last eight months. Our speculation? The loans are more profitable to the secondary mortgage market, and as a result the pricing is more competitive. This is not eached in stone, but it does serve to make sense given the way mortgage rates have been reacting.

Q: Are there any Sonoma County Home Loan programs that do not require mortgage insurance at all?

A: Home Path Purchase Loans for Fannie Mae owned property require no monthly mortgage insurance. The minimum down payment is 3%. Additionally, conventional loans with 20% down require no mortgage insurance. Fannie Mae and Freddie Mac owned loans, on the Making Homes Affordable Program can sometimes also require no mortgage insurance so long as the loan being refinanced did not have mortgage insurance prior.

Q: Bottom Line: Should I try to save for 20% down or buy a house today with the funds that I have saved?

A: This the money question. Let’s assume today that you can buy a house with mortgage insurance and get a 30 year fixed-rate mortgage at 4.125% and your monthly mortgage insurance is $150 per month. Let’s fast-forward down the road when the economy gets kick started again and the Federal Reserve increases short-term interest rates and the economy starts to feel inflationary pressures. Mortgage rates rise to 5.5%-6.0% and the housing sector begins gaining momentum. Let’s also say that house prices throughout Sonoma County rise upwards of 10%. Let’s also assume that it’s going to take you at least a couple of years to save up for 20% down.

Here’s the reality: home sales are already starting to rise, very slowly, but they are increasing. This is a small sign the local housing market is on the road to recovery. While you are saving for your 20% down, house prices over time slowly start to rise. So while you are saving, home prices are rising creating a further gap between your purchase price affordability and the house that you hope to be able to secure. Consider mortgage rates rising down the road as the economy gains momentum, as mortgage rates rise your purchasing power falls.

A better approach: purchase a house today for a few reasons and here is why..

1. Mortgage rates are dirt cheap right now. You effectively freeze your house payment for the next 30 years by purchasing a house now.

2. Mortgage insurance as we learned is not completely permanent. It might be a more prudent approach to saving funds for removing that mortgage insurance then for buying the house, because mortgage insurance is a variable that can ultimately be removed, while interest rates and price stability are external factors beyond anyone’s control. In not all but, most cases, purchasing a house now has never been more affordable, making saving up for 20% down the strategy of the past.

Get a Sonoma County Home Loan rate quote today with or without mortgage insurance, work out the numbers.

Deciding whether to purchase or refinance a mortgage with the prospect of mortgage insurance is a big decision. Talk with your mortgage lender about how to get rid of the mortgage insurance upfront and whether or not it makes sense to consider taking on the added costs.

Research mortgage insurance loans or get pre-qualified online today. See whether not mortgage insurance makes sense for your next Sonoma County Home Loan.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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