Mortgage Insurance 101 with Matt Berna

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August 17, 2021

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info@newhomeownercenter.com

What is Mortgage Insurance?

Now, so let's just start with the basics here. What is Mortgage Insurance? So Mortgage Insurance is initially geared towards protecting a lender. If a borrower walks away or stops making payments on a home, that's how it affects the lender. But really how it's going to affect a borrower is if you don't have 20 percent down, they will begin to go home early to start building equity instead of paying money towards rent.

History of Mortgage Insurance

OK, can you go over just kind of a brief history and just kind of how it came about and that type of stuff? Yeah, for sure. So MGIC, the company I work for is actually the founder of the private mortgage insurance industry we have founded. Sixty-four years ago in nineteen fifty-seven, we're based in Milwaukee, Wisconsin, before MGIC and private Mortgage Insurance. The only way you could put less than 20 percent down on the house is if you were a veteran. Our founder came back from the war and he realizes this is a huge market being missed. You know, he pooled a bunch of money together. He actually got money off his barber. We have a really cool story on our website about it. But he started MGIC just backing people, knowing that people could make payments, looking at their financial stability, their credit, or whatever, and understanding that there's a better market out there for people to get in homes.

Why do you need mortgage insurance?

OK, so why does someone need it then? Someone needs it if they don't have 20 percent down, right? So you look at it right now, the housing market is going crazy. Values are Appreciating like nuts. It's hard to get 20 percent down for a house. And you want to keep waiting and paying rent towards your landlord, paying their mortgage or putting less down pay Mortgage Insurance, getting in a house, and starting to build equity. Know. So I know a lot of people talk about Mortgage Insurance is quote-unquote throwing money away. But the flip side of that argument is to not bring 20 percent down. So if you're trying to save up money to get 20 percent down your you are paying your rent monthly, which is again, quote-unquote throwing money away, and then the Amortization of making those payments every month and then the Appreciation, you're missing out on that with the with when you're owning a home versus renting. You got it, let's say like last year, last year was still a hot market for mortgage and people last year, you know I want to wait. I'm going to let things cool off, going to save up to get 20 percent, I’m going to wait. Houses are depreciated almost 10 to 15 percent year over year. That's money lost. And while that's gone up, rent prices have gone up, too. So not only did you lose out on all that Appreciation you could have had in a home, now you're paying more for your rent and it's harder to catch up to save that 20 percent down. Yeah.

How is Mortgage Insurance Priced?

So how is it kind of priced like what kind of we're looking at when you're getting quotes and stuff from Mortgage Insurance. So anytime a Mortgage Insurance quote comes through whatever loan officer you are working with, they're going to be handling the quotes. And what they do is they look at kind of your financial background and you think of a Mortgage Insurance quote, think of it just like you get insurance quotes or anything else, your car insurance, homeowner's insurance, whatever you do, it looks at your profile, the person, your risk, your credibility, or don't look at your credit score, your LTV, which is your loan to value. That's how much you're putting down versus how much your house is worth your debt to income ratio, which is how much you make compared to how much you owe, how much you spend. And a couple of other factors about the house. If it's a single-family, if it's a duplex, there's a bunch of different risk characteristics that go into it to make a price that's unique to just you and your scenario. So generally, we're talking the longer the term, the less you put down and lower credit score, the higher the price of it is going to be. You've got it right. So the less you put down that's the more that the lender is exposed. So that means that's the more your Mortgage Insurance premium is going to be. Just like if you put more down, let's say you put 15 percent down in your Mortgage Insurance term to be smaller, then you'll also have to pay less because the coverage isn't as long.

How do you eliminate your monthly mortgage insurance payment?

That's the biggest question. Everyone's like once they realize that mortgage insurance is a good thing getting the help, how do I get the hell out of here? Yeah, I get it. Obviously. Want I get rid of it as quick as you can. I will tell you, it's completely up to whoever is servicing the loan. So once a borrower goes through their mortgage deal with you, then they're going to get you a servicer on that. The servicer is the one who kind of dictates the rules but is too kind of general rules that most people follow for canceling Mortgage Insurance. We're going to talk about original value here. So it's easier to explain. So any time you reach seventy-eight percent loan to value of the original loan amount, Mortgage Insurance is automatically canceled. OK. But with that, let's say. What was I going to go? Sorry, I lost my train of thought. No, no worries. So that's real value is seventy-eight percent. And then I know for my for what I do when we're seeing home prices skyrocket right now, the way that we usually will get people to either get rid of their Mortgage Insurance or to get it reduced is using a refinance. If you bought just a couple of years ago and the value of your house has gone up a ton, there might be the opportunity to get rid of the Mortgage Insurance because you have 80 percent, less than 80 percent of the loan to value now or maybe five percent down before, Now you have 10 percent equity, which will reduce your rent because you have a lower coverage percentage. You've got it. So you save me. Right.

That's the other option. Besides, using your original value is using your new value or current value. Excuse me. So current value, right. The market appreciated. You want to see if your home's gone up or maybe you've got an addition on your house that's added value. With that, you can get an appraisal done on your house to show the difference in value. And a lot of time the servicers on these or want to see at least five years servicing or seasoning, excuse me, seasoning this time in that mortgage to be over 80 percent. If it's been seventy-five percent, if it's been less than five years, they want to see two years, at least two years seasoning, and be at least 80 percent LTV. So those two different ways to go about it. There's more information on our website, a better job explaining it than I just did right there. OK, but the big thing to remember is any time you're at 78 percent original value, so you go out the Amortization schedule automatically done. Yep, I know that's a requirement of the servicer that they have to go and take that off there, which is a good value to people because a lot of people don't follow the value of their house and where their loan is at so that the servicer is doing a bit of a service. They're of eliminating it because they have to. Yeah, definitely.

How can I avoid paying mortgage insurance?

And the only way that I can think of is bringing that 20 percent down because it is providing a service. It's allowing you to buy a house with less than 20 percent down. You got that's the key. If you want to avoid Mortgage Insurance, you put 20 percent down. But the thing is, if you look at it right now, you can borrow money at the lowest rates it's ever been spent over 30 years. And let's say someone's going to use all of their savings to get that 20 percent down. Does it make sense to use all the money you have to get into this house? And then when you get a house, what do you do? You want to buy furniture. You want furniture, you want to do other things. You want to borrow that money on a credit card at twenty-five percent interest or take that over thirty years. Borrow at three, whatever it is, it's low, and use your money that you have instead. So, you know, it's kind of like a financial. Not financial gain, but, you know, you want to look at the right way to make sure you're doing things that work best for you instead of just trying to avoid Mortgage Insurance, which is probably going to be a pretty cheap cost monthly, too. Yeah, especially if you're doing a good job of working on your credit. You get in early when you talk to somebody to see where your credit is at, because even if you're thinking you're going to buy six months to a year out, get someone to look at it because you can make some improvements over that time, which will have a possibility of reducing your interest rate on your mortgage as well as the rate you're going to pay on the Mortgage Insurance. And that's where it comes in handy, working with a good lender like yourself. Right. You sit down with them, you look at their financial plan. What makes sense? When are we planning on buying this house? You start the process early with someone. So when the time does come, they're set there in the best position they can be and make sure that they get that house done.

Types of Mortgage Insurance

Is making a monthly payment for Mortgage Insurance? Is that the only option available? Are there other types? There are other different types. Monthly is the most common one you can think of is pay as you go, right? Just a monthly premium each month. Let's do another one that's popular, a single premium. So a single premium taking that whole policy, the whole entire thing that, you'd owe, and paying it upfront. And when you do that, you can either finance it in your loan amount or you can pay that at closing, two different avenues there. If you're worried about what your monthly payments are going to be, you want to get as low as possible. You can buy your policy outright upfront. I mean, don't worry about the monthly cost each time. And on our side, as a lender, one of the things that we'll run into with making that decision sometimes is your debt to income ratio. Sometimes you may have to do that upfront to be able to get under the debt to income ratio for your particular loan because having that monthly payment is going to be too high. But maybe you have more available money funds to be able to buy that upfront policy. So it's just something that, you know, you got to look at the pros and cons and what makes sense for your individual situation. Yeah, that's what you are there for too, right. You sit down, you explain the monthly vs single, you find out which plan works best for them, what they're most comfortable with, and help them out. And a great rock star like Jake is going to do that. He's going to walk you through the stuff to make sure you're on the right path.

Mortgage Insurance Terminology

Yeah. So one of the things people probably have questions on a little bit is the verbiage. So PMI Mortgage Insurance some of the other vocab for what you do. Could you just kind of explain what everything is just a little bit. PMI, MI they're the same thing where your going to see a big difference is when you start hearing FHA, VA, USDA, you'll want to think of it in two kinds of buckets it's again, conventional loans are ones that are going to have PMI, Mortgage Insurance ones that are government-backed. That's going to be a USDA loan or a VA Veterans Affairs loan for FHA Federal Housing Administration. Those loans have Mortgage Insurance, but it's not private Mortgage Insurance there's a difference there, conventional ones where you can get rid of your Mortgage Insurance on that. On the government side, you can not those are there for the life of the loan. OK, OK. I think that's all the questions I have for you here. Is there anything else you want to share before we go? Yeah. One other thing I want to say is we have some really good consumer tools as well. We have a website that's out there that's geared towards people getting ready and understanding the mortgage process. There are articles on there, people how they bought their first house. There are calculators to see. You can compare how much you can afford if you want to wait and see how much homes might appreciate. There's lots of really good stuff. That website is readynest.com. OK, so readynest.com is a good resource. If you want to learn more things about Mortgage Insurance or any other process of buying a house reach out to your lender, reach out to Jake to get something going. He's a phenomenal resource. He can help you out. All right. Well, thank you very much for being on Matt. Yeah, I appreciate it. Thank you.

*Any opinions expressed by Matt Berna are his own and not the opinions of MGIC*

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