Your Refinance: What You Need to Know About Mortgage Insurance
In many parts of the country, homeowners who refinance are dealing with something they never expected to–mortgage insurance or MI. Even those who bought their homes with 20% down payments may find themselves required to get mortgage insurance when they refinance–they no longer have 20% home equity due to decreasing property values in their neighborhoods.
How Does a Mortgage Insurance Requirement Affect Your Refinance?
Mortgage insurance can do several things to your refinance. It can:
- Increase the break-even period. By increasing your monthly costs, it decreases the savings that you would realize by obtaining a lower interest rate–and that means it takes longer for you to recoup the upfront costs of refinancing with your monthly savings. It can even negate the savings of a refinance altogether.
- Derail your refinance loan approval. In the past, an approval from your lender, even with a mortgage insurance requirement, could be counted on. Today, refinances are approved subject to the borrower (you) getting approved for mortgage insurance–and mortgage insurance underwriters are tougher (in some cases, MUCH tougher) than lenders’ underwriters. That’s because the mortgage insurance company is first in line when the losses are handed out if you default on your loan.
- Change Your Refinancing Plans. Refinancing and combining first and second mortgages can save you a lot of interest–typically, rates on second mortgages are substantially higher than those on first mortgages. However, if by combining them into a single loan you exceed 80% of your home’s value, mortgage insurance comes into play. You may have to keep your second mortgage in place and just refinance the first if you can’t get approved for or don’t want to pay for MI.
How Much Does Mortgage Insurance Cost?
If you live in a non-restricted market that is not undergoing declines in property values, you have a better chance of getting approved for mortgage insurance and you pay less for it too. But even that coverage doesn’t come cheap. One company’s rate card shows that if you refinance a $300,000 mortgage and your loan is 90% of your home’s value, your premium is .62%, which comes to about $155 a month!
How Does Mortgage Insurance Protect You?
The majority of mortgage advisers tell you that MI companies protect your lender, not you. But that’s only partially true. Yes, if you default on your mortgage, the MI company pays a claim to your lender–for example, on a 95% mortgage, the MI coverage is typically 35%–the lender only takes a loss if it can’t get back more than 60% of the loan balance in a foreclosure sale.
But MI companies don’t want to see properties go into foreclosure, so they may help you stay out of default if they can. This form of help is called a claim advance, and MI companies are willing to help you get past a temporary difficulty if it helps you keep your home and keep making payments. This is done with a low- or no-cost loan to pay your overages and get you current with your lender, avoiding foreclosure. Many times this assistance doesn’t have to be repaid until you sell your property.
