NO MI LOANS

(NO MORTGAGE INSURANCE)

In order for lenders to feel they have adequate collateral when making a loan, they will loan up to 80% of the value of the property, also known as 80% LTV.  In the event a borrower defaults, the 20% equity in the property is usually sufficient to protect the lender from taking a loss when the home is sold at the foreclosure sale.  However, many borrowers lack the funds to put 20% down, so two alternatives are available to help fill the gap.

WHAT IS MORTGAGE INSURANCE?
    The first alternative is known as mortgage insurance.  A borrower can get a higher LTV loan from the lender, and the mortgage insurance protects the lender against any losses above the 80% mark.  For example, if a borrower purchases a home for $100,000, but only has 5% ($5,000) to put down, then a 15% LTV gap develops.  The lender is only willing to take a risk on $80,000, so the borrower needs an additional $15,000 to close the deal.  Mortgage insurance steps in and places a guarantee with the lender by insuring them against any losses that they may incur on any portion of the $15,000.  Therefore, the lender is safe in loaning above the 80% LTV mark, and advances the full $95,000 to the borrower.  If the borrower defaults and the lender can only sell the home for $80,000, then the mortgage insurance company pays the lender $15,000.  If the house sells for $90,000, the mortgage insurance company advances $5,000 to the lender.  Based on this coverage, the lender has the same risk whether loaning 80% or 95% of the price of the home.  Since MI is insurance, there is a monthly premium that applies.  The borrower pays the premium payment with each monthly payment.

AN ALTERNATIVE TO MORTGAGE INSURANCE
    Due to the expense of the premium, many borrowers prefer to seek out the alternative to mortgage insurance.  Instead of a single loan, the borrower obtains one loan for $80% LTV, and takes a 2nd mortgage for the remaining amount.  Using our previous example, in this case the borrower would have a 1st mortgage of $80,000, and a 2nd mortgage of $15,000.  The rates on the 2nd will be higher, but the overall payment is usually less than what would be experienced with the mortgage insurance. 

WHICH IS BETTER, MI OR A 2ND MORTGAGE?
    No MI loans are typically preferable on higher LTV deals because the premiums jump as the LTV closes in on 100%.  The cost of the insurance exceeds the additional payment that would be experienced from the higher interest rate that is characteristic of 2nd mortgages.  Therefore, in such cases, the no MI option is finacially prudent.  However, as the LTV gets closer to 80%, the cost of the MI is lower, and often a borrower is actually better off with the mortgage insurance instead of the higher interest 2nd.

    There is one main advantage to accepting MI in lieu of a 2nd mortgage. By not having a recorded 2nd mortgage, the borrower is able to obtain a 2nd mortgage or Home Equity Line of Credit if desired sometime in the future.  This is usually not enough of an incentive in of itself for a borrower to accept MI, but if the payment difference between an MI loan and a 1st-2nd combination is close, then it does become a consideration.

    Deciding which option is better is a matter of calculating payments based on both options.  With any given purchase price and down payment, it is possible to state the total payment that would be experienced under either option, and then the borrower can decide which works best. 

NO MI LOAN TYPES

    No MI loans are classified by the amount of down payment a borrower has, rounded up to the next 5% mark.  The products are as follows:

80-15-5        80% 1st mortgage, 15% 2nd mortgage, 5% down. 

80-10-10      80% 1st mortgage, 10% 2nd mortgage, 10% down.

80-5-15        80% 1st motgage, 5% 2nd mortgage, 15% down.

80-20           80% 1st mortgage, 20% 2nd mortgage, 0% down.
    

    If a borrower puts 12% cash down, the actual 88%LTV is classified as 90%, and a 80-10-10 would be applicable.  If a borrower put 9% down, the actual 91% LTV would be classified as 95%, and a 80-15-5 would be applicable.