Yesterday I talked about the two major mortgage insurers and their tighter mortgage insurance requirements.  The new requirements could spell an end to much, if not all, of the 100% financing that is currently available.  Today I’m going to talk about mortgage insurance in general, and when it is required.

Mortgage insurance is typically required on any loan that is made at a loan to value greater than 80%.  In the past, borrowers have been able to avoid paying for mortgage insurance by breaking their financing into two parts, an 80% first, and then a second, or line of credit, for the remaining financing they require.  With the new, tighter lending standards, many lenders are not offering seconds at the high loan to values.  Due to this change in lending practices, it has become necessary to take one loan for the full amount rather than two, especially if you are looking for 95% or 100% financing.

Lenders require mortgage insurance to balance out the risk of lending at higher loan to values.  Borrowers pay mortgage insurance every month, and if they end up defaulting or falling behind on their loan payments, the mortgage insurance company comes to the table to make up the difference.  Having mortgage insurance on a loan also makes it more salable on the secondary market.  The more salable your loan, the better terms you are typically able to obtain.

The positive of having mortgage insurance is that you can get a better rate on your loan.  Also, instead of taking a low rate on your first mortgage, and a much higher one on your second, you can have that low rate on all the money you borrow.  If you plan on staying in your home for a period of time, it is beneficial.  Once your home appreciates to the point where you owe 80% or less of the home value, you can petition to get the mortgage insurance removed, keeping the low rate mortgage without needing to refinance.

The negative of having mortgage insurance is that it is an extra expense each month.  Usually, the difference between the higher rate second you would have and the less expensive money of the first balances this expense out.  In the past, you have not been able to write off mortgage insurance like you could interest, but that may be changing, if it has not already.  Talk with your tax professional for information about that.

If you are looking to finance a property over 80%, you should explore both options available to you, a loan with mortgage insurance, and two loans to avoid mortgage insurance.  Get both options so you can compare them side by side and make a proper business decision for your financing needs.  If you would like more information, or if you are looking for a home loan in California and want to know what options are available, please feel free to contact me directly.