MI, or MI Not…That Is The Question

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Before looking at what the options are, let's look at exactly what MI is, and how and why it works. Let's say you were looking at a $100,000 home in the pre-MI era. You would need enough cash to make a 20 percent down payment--$20,000--plus additional money for closing costs, moving expenses, and so on. In those days, lenders insisted on a 20 percent down payment to cover them in case they had to foreclose.

Here's why. A lender who forecloses often loses money. By the time the foreclosure actually takes place, the lender has usually lost six months or more of payments and must pay legal fees and court costs. On top of that, foreclosed houses tend to need work--work the lender has to pay to have done before the home can be sold. The lender also has to pay all the fees associated with the sale, including real estate agent commissions. Selling a house often "costs" 10 percent of the home's value. When you apply that math to a foreclosure, and add in lost revenue and repairs, it can be closer to 20 percent. That's why lenders want either 20 percent down, or MI. It's their cushion.

With MI there are actually two numbers: 20 percent and 22 percent. If you put 20 percent down you don't need MI. If your down payment was less, once you reach 20 percent equity, you can formally petition the lender to drop MI. This usually happens as a result of a combination of payments and increased property values, but you will have to pay for an appraisal, and go through the procedures your lender has established. Or, if you got a loan after July 22, 1999, your MI is automatically cancelled once the mortgage has been paid down to 78 percent (22 percent equity) of the original value of the house.

The most common way to avoid MI is to take out a second mortgage. It's called "piggybacking," according to Patrick Sinks, executive vice president of Mortgage Guaranty Insurance Corporation (MGIC), an MI provider. Let's look at a $100,000 home with 5 percent, or $5,000, down. If you get a $95,000 mortgage, you will need MI. On the other hand, if you get a first mortgage for $80,000 or 80 percent, and a second mortgage for $15,000 or 15 percent, you do not need MI because it is required only if your first mortgage is for more than 80 percent of the home's value. As Sinks points out, however, you wind up with two loans and all the extra fees they entail, as well as two monthly payments.

MI payments depend upon many variables. You can ask your lender what they would cost, or use the MICA calculators http://www.micanews.com/calculators/. Then compare that figure to the cost of a "piggyback" loan. At times, MI actually is cheaper in terms of being able to pay your monthly bills. MI companies now also offer new options to make MI more attractive. Check out the MICA website, at www.privatemi.com.

Some alternative programs include GMIC's SingleFile program, where the lender pays the MI. You need a good credit history to qualify, and the interest rate will be higher. That interest will stay the same, however, even after you cross the 20 percent equity line. Genworth Financial's HomeOpeners programs lets borrowers choose among options that include cash back at closing, or getting a tax break by paying points to lower the interest rate. They also offer insurance to protect borrowers from foreclosure if they become unemployed because of a layoff or medical problem. Radian Guaranty offers a Free After Five program. A homeowner who is never late making a payment stops paying MI after five years. Radian continues to insure the lender. MI payments, however, will be slightly higher.

There are probably as many good reasons for getting MI as there are for avoiding it. You are the only one who can decide what is right for you, your income, and your future. Look at your financing options. Do the math. If an MI program works for you, tell your lender. "If the lender you're dealing with doesn't work with a particular MI company," Lubar adds, "or one that offers a similar program, call around and find one who does."

MI is not about to go away, because the need is not going away, according to Jeff Lubar, communications director for Mortgage Insurance Companies of America, the industry trade group. "When mortgage rates go up," Lubar points out, "it gets tougher to afford a home. People have a rough time coming up with the down payment. That's what MI is for, to help people buy homes." There are millions of homeowners with MI, and even if they aren't thrilled about paying it, they are thrilled they are homeowners.