Mortgage Insurance & Interest Rates
by Craig Goebbel
President & CEO, LoanTek, Inc.

Last week I covered some of the charges associated with your loan transaction. Of the three, the most expensive is mortgage insurance. As I wrote last week, unless you have 20% of the sales price (cash or borrowed) for a down payment, mortgage insurance is a welcome expense since it opens an otherwise closed door to home ownership.

Mortgage insurance comes in many shapes and sizes, depending on the loan.

Let’s take a look at your options.

VA Loans – The veteran pays an up front mortgage insurance fee called a VA Funding Fee each time they finance a home with a VA Loan. The first time it is used the fee is 2% of the loan amount for 100% financing. After that, each purchase has a 3% funding fee unless there is some down payment. A reduced funding fee is charged for refinance transactions and the fee is waived for veterans with a VA recognized disability. In almost all cases the VA Funding Fee is financed by adding it to the loan balance.

The VA funding fee is a one-time fee, collected up front and is never refunded.

FHA Loans – The FHA borrower pays two forms of mortgage insurance. First, there is an up front fee of 1.5% of the mortgage balance. This is usually financed by adding it to the loan. The FHA borrower then pays FHA MIP every month. To calculate the monthly MIP just multiply the mortgage balance by .5% and divide that result by twelve.

In most cases, a partial refund of the up-front MIP is available if you pay-off your FHA within five years. The monthly FHA MIP will terminate when the loan-to-value reaches 78% either by regular amortization or additional prepayments but never before a minimum of five years of monthly MIP payments are paid, regardless of loan-to-value

Conventional Loans – We are talking about loans accepted by Fannie Mae and Freddie Mac. Private mortgage insurers provide this mortgage insurance. You can finance private mortgage insurance or you can pay it monthly. The premium paid each month depends on your initial down payment but the more you put down, the smaller the premium.

Private mortgage insurance paid up front may be refundable. Many mortgage insurance policies include provisions for refunds, but some lenders select non-refundable policies in order to reduce closing costs for homebuyers. Under non-refundable policies, no premium will be refunded when coverage is cancelled, unless cancelled under the Homeowners Protection Act of 1998. If you need specific information on an existing mortgage loan, please contact your lender directly.

Monthly private mortgage insurance can be eliminated when your loan-to-value drops below the 80% threshold. If your pay attention to the private mortgage insurance disclosures it seems like you are stuck with it for ten years. However, both Fannie Mae and Freddie Mac have reasonable guidelines for mortgage insurance elimination in as soon as two years. Your lender can show you even more ways to detach the private mortgage insurance premium from your monthly payment.

This Week’s Rate Recap

Looking at the chart on the left things look pretty good but the chart is a look backwards. As of this writing rates had hit bottom and started to tick up, just a little. If you are waiting for low-cost 30-year mortgages in the fives, you will wait forever. If you want to take advantage of rates at historical low levels, now is a good time.

© 1999 - 2004 LoanTek

Craig Goebbel is President and CEO of LoanTek.com, mortgage loan brokerage.  He is also producer and host of Real Estate Radio Show, a Seattle-based talk show featuring mortgage and real estate news, interviews and listener calls. It is broadcast on KVI Radio AM 570 in Seattle, Washington. Past show are also webcast via the Internet at http://www.realestateradio.net.

Real Estate Radio Sponsor

Real Estate Radio with Goebbel and Gray is the leading real estate radio talk show in the world and is hosted by Real Estate home mortgage expert Craig Goebbel, owner of LoanTek Home Loans and Robb Gray of John L. Scott Real Estate.