December 3, 2018
We recently discussed private mortgage insurance – a little primer for our brokers. The flip side is having it removed. With interest rates no longer at rock-bottom levels, Orion’s brokers know that fewer borrowers still have an opportunity to profit by refinancing into a lower interest rate. The escalation of house prices, however, in most areas that Orion covers lends raises the possibility of profitable refinances, specifically when directed to lowering other costs such as borrowers who purchased mortgage insurance when they took out their current mortgage. These borrowers may now have enough equity in their house that they can refinance into a mortgage that will not require mortgage insurance.
The question our brokers ask, does the monthly MI premiums that are eliminated exceed the cost of refinancing plus the higher interest cost of the new mortgage over its future life? In making this comparison, the monthly premiums that are eliminated should be measured over the period until insurance on the existing mortgage is terminated. When that can happen depends on the termination rules to which the mortgage is subject. The priority for borrowers paying for mortgage insurance is to determine whether they can get it terminated with the help of a broker.
There are two sets of rules. Under the Federal rules applicable to all home mortgages, borrowers can request their lender to terminate their insurance when their loan balance reaches 80 percent of the original property value at the time the loan was originated. The older the loan, the smaller the potential saving.
If the loan was originated under Fannie Mae/Freddie Mac guidelines, termination is based on current appraised value rather than original value. The minimum period is two years if the current loan-to-value ratio is 75 percent or less, five years if the ratio is 80 percent or less. The borrower must request termination and pay for an appraisal.
The cost to which the saving in insurance premiums should be compared consists of upfront origination costs and higher interest cost over the future life of the new mortgage. The interest cost depends not only on the difference between the rate on the old and the new mortgage, but also on how long the new mortgage will be in force. For most borrowers, this is a guess with a large margin of error. Orion appreciates that there are brokers there to walk clients through this potentially money saving decision making!