May 30, 2017
Last week we discussed the limited choices if an appraisal comes in low. Orion’s brokers know very well that the loan-to-value of a mortgage determines many things, including the pricing of a loan, and the necessity of having private mortgage insurance on conventional conforming loans.
Orion offers many programs loans with loan-to-values (LTVs) above 80%. Fannie Mae and Freddie Mac, who offer conventional loan programs that Orion offers, require “mortgage insurance” at LTVs above 80%. Brokers usually have clients who have heard of private mortgage insurance, also known as PMI, but may not be certain exactly what it is. Given that it is May, and we’re seeing a pick-up in purchases, we thought it would be a good time for a refresher on what mortgage insurance is.
On a conventional loan, if a client’s down payment is less than 20% of the purchase price, then they’ll need to pay for this additional insurance to secure a loan for the home. It is also required for a refinance and the client has accrued less than 20% equity. So, on a $400,000 house, if the loan amount is above $320,000, they will need PMI. This type of policy protects the lender in a foreclosure situation to recoup all or most of their capital.
The fees involved with private mortgage insurance vary depending upon a few factors including the actual size of the down payment and the credit score. One can expect the cost of the insurance to be somewhere between 0.3% and 1.5% of the loan amount per year, whether it is Orion or another lender. Private mortgage insurance premiums are most often paid as a monthly fee but a large payment upfront is available depending upon the type of loan.
Orion’s brokers will tell their client that the cancelation of the PMI premium is dependent upon the LTV of the mortgage loan. If a home is worth $100,000 and $80,000 is still owed on the home, the loan-to-value ratio is 80 percent. Once a loan reaches 78% LTV, either through appreciation (owing $80k but on a $110k house), or paying down the principal, the lender should cancel your PMI coverage. It is a good idea however to keep track of one’s LTV. Once the loan is paid down to 80% of the original value, the lender can be asked if they will cancel the PMI payments. Depending upon the lender and the current loan program, this early cancelation is sometimes an option – ask your Orion AE for more information.