Mortgage Insurance - And How To Avoid It

Mortgage Insurance is written by an independent mortgage insurance company and protects the mortgage LENDER against loss incurred by mortgage default. Mortgage insurance is mandatory for typical conventional loans that are more than 80% of the appraised value. It is always required on government loans regardless of the loan amount. The amount of this premium varies according to the "loan term" for government loans and according to the amount of down payment (equity on a refinance) on conventional loans. It is not tax deductible.

The issue here is that mortgage insurance is not tax deductible, interest is, and that it comes out of your pocket and does not benefit you other than you "gotta" have it to get the loan. You do have options you can consider:

For a purchase using a Conventional Loan put 20% down or on a Refinance stay below 80% "Loan to value".

If you have a conventional loan on your home and you believe the loan amount is now below 80% of the market value you can make a request to your lender that it be discontinued. This will usually require a new appraisal. Some lenders prefer to use their own appraisers so check it out before you spend the money.

Another way to avoid mortgage insurance is to consider a different type of loan or combination of loans for your transaction. In today's market there are literally dozens of loan types available. There are lots of "No MI" programs and the interest is about .375% to 1% higher based on loan to value. Remember interest is tax deductible. If your loan amount is over $417,000 (Jumbo Loan) a combination of loans could be of particular interest to you since it could put you back in the conforming market with lower rates.

Here is an example of a combination loan that can save you cash flow:

80-10-10:
This program involves 2 loans and only 10% down payment instead of 20%. The first loan would be at 80% (Low rate and no MI). The second loan would be at a slightly higher rate but only applies to 10% of the total loan. Thus, WHA LAH, your mortgage payment on the two loans is less than it would be on one loan WITH mortgage insurance. And, again, interest is deductible.

Example:
The 80-10-10 plan requires 10% down. On a $100,000 home that is $10,000. The first mortgage is $80,000 @ 7.5% interest and the payment would be $559 per month. The 2nd mortgage for $10,000 @ 9.5% interest will have a payment of $84 per month. Total of both loans is $643 per month.

In comparison, the same down payment of $10,000 and One mortgage of $90,000 the payment would be $629 per month PLUS $31.45 for MI. Total payment of $660.45 per month. That is $17.45 more than the 80-10-10.

On a final note, If you do not qualify for a conventional loan because of loan amount, income, credit, or type of house, mortgage insurance may not be an issue at all. Most non-conforming loans do not require mortgage insurance. Because of course, they are charging a higher rate of interest.

FHA Mortgage Insurance, MIP, UFMIP

FHA mortgage insurance is a very large topic and very detialed. I get questions from processors and Loan Officers all the time on this subject. We created a web site just for FHA Guidelines. You can find detailed information here about FHA MIP and UFMIP.