Monthly Private Mortgage Insurance – It Doesn’t Make Any Sense
It is inevitable that FHA will play less and less of a role in the lending market. As this unfolds, it's critical for loan officers, Realtors
and borrowers alike to understand the many options in the improving private mortgage insurance market. In the distant days when home values were increasing, it made perfect sense for borrowers to opt for monthly mortgage insurance and wait till their home had appreciated to the point where they had a twenty percent equity position. They'd soon call their lender to get an appraisal ordered and drop their monthly mortgage insurance. Those days are gone. In times prior to the days where home values were increasing, there was not a diversity of private mortgage insurance products to choose from nor were there dramatic differences and complexities in the underwriting of private mortgage insurance. Those days are gone as well.
As though there isn't already enough to know, real estate professionals need to know the differences between the mortgage insurance providers (i.e. RMIC, PMI, Radian, MGIC, Genworth, United Guaranty, Commonwealth and others). They also must know the advantages and disadvantages of the different types of premiums. For simplicities sake, let's just mention lender paid mortgage insurance (LPMI), borrower paid monthly, split premium and single premium. Sadly, if you look up mortgage insurance on Wikipedia, you won't even see split premium or single premium and they make more sense than LPMI and borrower paid monthly offerings. This typifies the problem borrower's face in today's market.
Let's start with the basics. Here are some working definitions:
1. Borrower Paid Monthly Mortgage Insurance - For this premium type, the cost of the monthly premium is rated by the loan to value and credit score. Although guidelines vary between insurers and from state to state, typically, the monthly payment must be made for a minimum of 2 years and isn't droppable until the borrower has a twenty percent equity position in their home. For this to happen through making the minimum payments and appreciation in this market, it would be a long time before that happened. For that reason, in this market, monthly mortgage insurance is the worst of all choices.
2. Lender Paid Mortgage Insurance - First one should know LPMI really is. It's basically an insurance premium that the lender pays on behalf of the borrower. However, this is done by offering a higher than market rate. When there weren't tax benefits associated with private mortgage insurance or a diversity of mortgage insurance products in the marketplace, LPMI had its role. These days, that role is minimal at best. There are instances where it makes sense but they are so few that they aren't worth mentioning.
3. Split Premium Mortgage Insurance - This is the newest of the offerings. It works similarly to FHA mortgage insurance premiums. A portion of the overall premium is paid up front (by a borrower or seller) or it can be financed into the loan and in exchange, the amount of monthly mortgage insurance is reduced. Not all insurance providers offer this product and it really should only be used when single premium mortgage insurance is not an option due to excessive costs or something of that nature.
4. Single Premium Mortgage Insurance - In most, and I dare say nearly all cases these days, this is the best option. This is where there is a fee paid one time and it eliminates any monthly mortgage insurance and does not adversely affect the interest rate. And that's it. One time and it's gone. In nearly all cases, where a borrower has a middle credit score of 680 or better and a loan to value of between 80.01% and 95% (assumptions apply to the market as of the date of this article), this premium will pay for itself in approximately 24 months. Sometimes it takes a little longer and sometimes it takes less time to pay for itself but it's usually approximately 24 months. This single or one time premium can be paid by the borrower, a seller and in some cases financed into the loan. A common misperception is that a seller can't pay for more than 3% towards closing costs. This is only true for loans with loan to values greater than 90%. For loans with loan to values between 80% and 90%, the seller can pay up to 6% towards closing costs so the premium can often be worked into the seller concessions in a purchase agreement.
Between the middle of 2007 and the 4th quarter of 2009, private mortgage insurance premiums rose and guidelines were tightened. That trend has reversed. For the private mortgage insurance companies, getting the word out that their products have improved has been difficult at best. PMI even went to the trouble of creating an online calculator to show how much cheaper private mortgage insurance is when compared to FHA's mortgage insurance premiums (particularly how much cheaper single premium insurance is). The sooner real estate professionals are aware of this trend; the better the public will be served.
Always shop for mortgage insurance! This is a big one. I don't know of a meaningful mortgage insurance company that doesn't have an online mortgage insurance calculator. Not only are there definite price differences between premium types but there are different prices between mortgage insurance providers. Most borrowers spend less time shopping for a mortgage than they spend shopping for a car and they spend most of that time evaluating rates and closing costs when, often times, they'd save more money shopping for mortgage insurance. These mortgage insurance calculators can tell a borrower which vendor they want for their transaction even in the event that their loan officer doesn't counsel them on the choices.
Another misperception is that the mortgage broker, mortgage banker or banks dictate who the mortgage insurance company will be. This is only partly true. If a mortgage broker is arranging a loan for a borrower through say, AmTrust, they can request mortgage insurance from MGIC or RMIC (and perhaps others). A mortgage banker or correspondent lender is rarely only setup with one mortgage insurance company. And rarely would a bank be captive to one insurer. So, a borrower can and should shop for their mortgage insurance company and ask for them by name when they are asking for quotes on interest rates and closing costs.
A lot has changed in the housing market and those changes have changed the private mortgage insurance market. Get to know your split and single premiums, shop for your private mortgage insurance and lose your belief that FHA is the high loan to value loan of choice (as far as I'm concerned, it's the loan of choice for borrowers with lower credit scores, rehab loans and buyers who just had a short sale and that's about it).
Click here to shop for private mortgage insurance using these online calculators!
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