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Mortgage Insurance – What does it do and Where can you get it?

What is Mortgage Insurance?
Mortgage insurance (also known as MI) is an insurance policy taken out by a mortgage provider (e.g. Bank Mizrahi, Bank HaPaolim, Bank Leumi etc.) to protect themselves against losses that they would incurred in the situation that the borrower is unable to pay back the mortgage. The beneficiary of MI is the mortgage provide, NOT the borrower.

In Israel MI is known as Bituach Mashkanta. This is not to be confused with Bituach Neches, which is property insurance and is offered by many insurance companies in Israel.

How does EMI’s MI work?
At the time a borrower applies for a mortgage, the mortgage lender must determine if:
1) They are prepared to offer the borrower a mortgage without MI.
2) They are prepared to offer the borrower a mortgage only with MI.
3) They are not prepared to offer the borrower a mortgage under any circumstances.

If option 2) is selected, the mortgage bank sends all their loan and borrower documentation (such as the property valuation , past pay stubs, banks statements, the loan application) to EMI. EMI’s underwriting department will then review the loan application. If the application meets their criteria for insuring a loan, EMI informs the bank, and they move forward with the loan. If EMI is uncomfortable insuring the loan, it will inform the bank of their decision. Neither the bank or borrower charged for submitting a loan application to EMI.

If the borrower defaults, the bank will foreclose on the property and then sell it at an auction – typically at a market discount. Any loss they experience at the sale will the be reimbursed by EMI.

What kinds of loans require MI?
Loans that require MI can be broken down into two groups:

I. Higher LTV loans – LTV is an abbreviation for Loan-to-Value. That is the ratio of the amount of the loan that a borrower takes relative to the value of the property. For example, a $60,000 mortgage on a $100,000 property would have an LTV of 60%. In real terms, the borrower has put down $40,000 (40%) of his own equity in order to purchase the house. Loans above 75-80% are typically referred to as high LTV (HLTV) loans.

The reason MI is required on higher LTV loans are twofold:
a. Statistically, the higher the LTV, the higher the probability that a borrower will default on his mortgage. This makes sense from a logical perspective if you picture mortgage payments as a way to protect your investment in your house. One who have put down little equity in purchasing a home will be more greatly inclined to simply stop paying their mortgage in the event of financial stress – since it would only result in a small investment being lost. A borrower, however, who has put down half of the purchase price will be more likely to try and protect his investment.

b. The potential loss to the bank in the event of foreclosure is higher for HLTV loans. The below table illustrates this:

II. Loans to borrowers with damaged or questionable credit – Regardless of the LTV, banks may be unwilling to lend to those with past or current credit issues, such as bankruptcies, bounced checks, etc.

Who pays for EMI?
In the event that EMI has agreed to insure the loan, the bank will insist the borrower to pay the insurance premium. This is a one-time only charge paid at the time of the loan origination. If the borrower does not have the necessary funds to pay out of pocket, the bank is often willing to add the premium amount to the loan balance. For example, if the borrower wants a $200,000 mortgage that will require MI, and the premium will be $6,000, the bank will pay that sum to EMI and will then add the $6,000 to the $200,000 mortgage. The borrower will then repay mortgage of $206,000.

How much will I be charged for MI? How is this amount determined?
The premium is normally set between 1% and 4% of the mortgage loan. The rates are a function of LTV and loan term – the longer the loan term and the higher the LTV, the higher the premium. For a 90% LTV loan for 30 years, the premium rate will be roughly 4%.

What is the highest LTV loan I can obtain?
Almost all mortgage banks in Israel will allow borrowers to go as high as 90%. Some allow up to 95% LTV loans. However, most banks have internal restrictions with respect to non Israeli-residents purchasing a home in Israel, and often limit the LTV to 75-85%.

In other words, if I take a 90% LTV loan for 30 years, the premium rate will be roughly 4% of the loan balance. Even when adding that amount to the loan balance, won’t that make it a very high amount to repay? Assuming that you take a 90% LTV, $200,000 mortgage for 30 years at a rate of 5%. Your monthly mortgage payment is roughly $ 1073. An MI premium rate of 4% will increase your balance by $8,000 to $208,000. The monthly premium rate on such a mortgage will be $1116 – a difference of only $43 a month.

If I pay back my loan, do I get the premium refunded?
At the time you prepay your mortgage in full or in part, so that the mortgage bank no longer requires MI, EMI will refund a portion of the premium to you.