Dennis' Mortgage Blog

Weekly Rate & Market Upate 3-24-17
March 24th, 2017 3:05 PM

Question of the week: What exactly is mortgage insurance? Is it something that is mandatory for purchasing property or just the property I am buying?

Answer: With the increase in the purchase market and more first time buyers coming to market it is time to revisit mortgage insurance. Though making a comeback, piggy-back mortgages transactions which can avoid mortgage insurance are being evaluated differently in the current market than in years past—especially with the recent and future increases in the Prime Rate.

Mortgage insurance defrays some, perhaps all, of the cost to a lender if a loan goes into default and foreclosure. Depending on the loan type and initial loan-to-value (LTV) of the mortgage, the lender will require certain amount of coverage from mortgage insurance.

For FHA mortgages the full amount of the mortgage is covered and all FHA mortgages require two forms of insurance premium be paid, an upfront premium that is added to the loan amount and a monthly mortgage premium. Recently FHA changed it guidelines so all new FHA mortgages require the monthly premium be paid for the life of the loan. Keep in mind the minimum down payment for FHA is 3.5% for the maximum loan amount of $625,500. With that much leverage risk it is not surprising that FHA has mortgage insurance to off-set some of the costs should the loan go into foreclosure.

For Fannie Mae and Freddie Mac mortgages, also known as conventional or conforming mortgages, mortgage insurance is required on all mortgages that have a loan to value greater than 80% of the property value; i.e. if the value of the home is $400,000 and your mortgage is greater than $320,000 you will be required to have mortgage insurance. This is for all conforming mortgages, regardless of refinance or purchase, condo or single family detached home.

For conforming loans the vernacular is PMI, or Private Mortgage Insurance, as the insurance is made by a privately held company. For FHA the vernacular is MMI and/or UMIP for Mutual Mortgage Insurance or Upfront Mortgage Insurance Premium; FHA mortgage premiums are collected by the federal Department of Housing and Urban Development—it is a government insured mortgage.

For PMI the premium varies on the loan to value of the mortgage, type of mortgage and borrowers’ credit scores. The higher the LTV, i.e. the lower your equity or down payment on a purchase, the higher the coverage required by the lender and therefore your mortgage insurance premium. The coverage goes from 30% for loans with LTV between 90.01% to 95% to 25% for 85.01to 90% and 12% for 80.01% to 85%. The greater coverage required for your mortgage the higher your PMI premium will be.

As well the higher your credit score the lower your premium will be.

What does 25% coverage mean? If a mortgage is covered by PMI with 25% coverage then if the mortgage goes into default the PMI company will pay the lender up to 25% of the mortgage amount to cover costs and losses due to the foreclosure. Note that after missed interest payments, legal fees, filing fees, plus the potential loss in loan principal because of a foreclosure is often much greater than 25%, depending on current market conditions.

Other loans also may have mortgage insurance depending on the product and lender. Some banks are offering our clients on “jumbo” mortgages, greater than $625,500 conforming loan limit, with no mortgage insurance for loans with LTV greater than 80% up to 90%. They “self-insure” the loan by charging a much higher interest rate than a mortgage with 80% loan to value, but there is no separate underwriting or payment.

Veterans obtaining a VA mortgage also have a version of mortgage insurance, called a “funding fee” that is added to the mortgage amount.

For PMI borrowers there are a few options as to what type of premium to use to pay for the mortgage insurance requirement.

Have a question? Ask me!

Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.

A bit of a slow news week for market moving data, especially after last week with plenty of market moving data plus the Fed rate increase. Of importance this week is housing sale activity for February. Nationally sales dropped 3.7% in February, but were still up 5.4% from February 2016 and the median price nationally has 7.7% in the past year to $228,400. More locally the California Association of Realtors reports that statewide home sales dropped 4.7% in the month and are up 4.9% from last year with the median price dipping a bit in February from January to $478,790—though that is still up 7.6% from 2016. Even more locally, LA County saw sales drop 8.8% from January and prices decline 7.7% for the month as the median price dipped from January to $470,000 in February, which is 5.7% higher than last February’s median price. Orange County bucked the trend a bit with sales down only 0.9% from January (up 0.3% for the year) and a slight increase in the median price to $745,000, matching the 5.7% annual price increase seen in LA County. Overall the news is mortgage rate neutral.

Rates for Friday March 24, 2017: After all the excitement last week Mortgage Backed Securities (MBS) rebounded this week, moving inversely to the equity markets. When MBS prices rise mortgage rates drop—think of a see-saw with rates on one side and price on the other. As a result rates have slipped down a little more this week to where they were at the end of February.

30 year conforming                                         4.00%       Down 0.125%
30 year high-balance conforming                   4.125%     Down 0.125%
30 year FHA                                                   3.50%       Flat
30 year FHA high-balance                             4.00%        Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages.

I really enjoy live theater and older musicals, give me a Rogers & Hammerstein show or soundtrack and I’m pretty happy (or almost anything with Doris Day, Fred Astaire, Gene Kelly…). This weekend we are going to see “An American In Paris” and I am looking forward to the music of the Gershwin’s wrapped around the story.

Our theater trip is a good diversion as well since with tonight’s games still to be played I have lost two Final Four teams (Duke, Arizona) and my winner (Duke) from the NCAA tournament—I have a feeling many other brackets are also a bit broken with four #1 and #2 seeds bounced and three more in action tonight, I know a lot of UCLA Bruin fans are hoping another two seed goes town tonight with they play Kentucky.

Have a great week, I hope your brackets are going stronger than mine,


Posted in:General
Posted by Dennis C. Smith on March 24th, 2017 3:05 PMPost a Comment

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