The Higher Rates Go, the More Attractive Mortgage Insurance Becomes.
Mortgage rates are set by the credit markets. But mortgage insurance premiums can stay the same, even when rates are moving up. The mortgage insurance multiplier remains constant, meaning that while rising mortgage rates can increase your monthly payments, the mortgage insurance premium will stay the same.
Compare a $300,000 home with 10 percent down using different rates:
30-year first mortgage 6.00% $240,000 $1,436
15-year second mortgage 8.50% $ 30,000 $ 289
Total payment $1,725
30-year first mortgage 8.50% $240,000 $1,844
15-year second mortgage 11.00% $ 30,000 $ 336
Total payment $2,180
Now look at that same scenario with 10 percent down and a mortgage insurance payment:
30-year first mortgage 6.00% $270,000 $1,616
Mortgage insurance premium $112
Total payment $1,728
30-year first mortgage 8.50% $270,000 $1,886
Mortgage insurance premium $112
Total payment $1,998
When rates are relatively low, the total monthly payments are remarkably similar: $1,725 versus $1,728, for example. But as rates increase, the payments for the 10 percent down with mortgage insurance are much lower: $1,998 compared to $2,180.
Mortgage Insurance Can Cancel Your Loan Approval.
Decades ago, when mortgage insurance was first introduced, the mortgage insurance application had to be approved by both the lender and the insurance company. In short, the loan had to get two approvals.
In the 1990s, long after mortgage insurance had become an industry staple, mortgage insurers felt comfortable enough to lighten their own workload while at the same time selling more insurance policies. After all, loan choices were limited, and the insurance industry had established its own system of assigning mortgage risk that lenders could follow. Mortgage insurers ultimately allowed lenders to approve both the loan and the mortgage insurance premium. Lenders were supplied with the insurance companies' guidelines, and the lender agreed to follow them. The lender benefited as well because it didn't have to wait for a third party to approve a loan that it had already issued its own approval for.
Still later, mortgage insurance companies and mortgage lenders agreed that as long as the lender approved the mortgage loan, the mortgage insurance policy would be approved automatically. No more multiple approvals were needed, regardless of who did the approving. Mortgage insurance companies followed the same treacherous path as mortgage lenders did in the 2000s and began lowering their credit standards. When lenders offered low- or no-down loans to people with bad credit, they needed an insurance policy, and they got those policies from those same mortgage insurers. Mortgage insurers offset the additional risk associated with the lower-quality loans the same way mortgage lenders did: They increased their rates.
Soon, however, they fell victim to the same mortgage problems as lenders did and had to pay insurance settlements to the lenders who had approved the policies that the mortgage insurers were paying out on. Sound a little odd?
Not only does it sound odd that a company would assign risk on behalf of an insurance company that would pay out if the loan went bad, but it was also terrible business practice. Mortgage insurers clamped down.
Now, only those loan underwriters that are specifically approved by the insurer are qualified to underwrite and approve mortgage insurance policies. In addition, mortgage insurers have issued their own guidelines that can cancel a loan approval.
For instance, while a mortgage lender would approve a mortgage loan with 5 percent down on a condominium purchase for a first-time home buyer, a mortgage insurance company would decline that loan. In the past, if the loan was approved by the lender, it would automatically get mortgage insurance approval, but no longer. Conventional loans used to offer a zero-down option for first-time home buyers, but mortgage insurance companies opted out of insuring those programs, effectively eliminating them. Is your loan originated by a mortgage broker? It's possible that your mortgage insurance company won't accept your loan, much less approve it, as mortgage insurers may no longer approve mortgages that came from a broker.
If you require mortgage insurance, keep in mind that you may need to be underwritten twice. This is a significant consideration when you're looking at an 80-10-10 loan or one with mortgage insurance. If you're a first-time home buyer with 10 percent down who's buying a condo, you'll obviously want a first and second mortgage, regardless of your income.