MI Series Part 3: Myth-Busters—Clarifying MI’s Value in a Growing Low Down Payment World
My name is Steve Richman, and I’m That MI GuySM for Genworth Mortgage Insurance. Mortgage insurance isn’t exactly a mainstream topic, but it makes a mainstream impact by allowing borrowers to secure a mortgage without the traditionally required 20 percent down payment. Throughout this four-part series, (Part 2 here) I will use real-life testimonials to show you how this works, and hope that you can apply some of these tips to your own situation.
The following testimonial is from Denise Drews, Mortgage Loan Originator for American Bancshares Mortgage, based in Clearwater, FL:
As a homeownership solution, private mortgage insurance (MI) has gone through a tremendous makeover in terms of how it is perceived in today’s market. In the 1980s, separate underwriters were the norm, and they were tougher and more stringent. But today’s marketplace is being driven by first-time homebuyers, many of which have financial situations that drive them toward low down payment mortgage solutions. And, while this demographic has shown a propensity to educate themselves on all available options, the purchase market overall is still working towards a broader understanding of these options.
With that said, there are several key myths that are worth de-bunking as originators, real estate agents and consumers look to accelerate homeownership dreams.
Myth #1: You need to pay a monthly insurance premium on a privately insured mortgage.
Traditionally, consumers who purchase a home with MI can expect to pay a monthly insurance premium on top of their mortgage payments. This is the most common form of Borrower-Paid Mortgage Insurance, or BPMI. However, for those who are concerned about higher payments, Lender Paid Mortgage Insurance, or LPMI, might be an option. In this situation, borrowers pay a higher interest rate to make up for not paying the MI, which remains in effect for the life of the loan, but it does typically result in lower monthly payments, which is helpful to cash-flow conscious buyers.
I recently had a millennial-aged buyer make a big purchase using a 5 percent down payment and LPMI, and he was approved despite his wife having a lower credit score at the time. Their interest was tax-deductible, and the product saved them $100 per month versus having a borrower-paid MI premium on top of their mortgage.
To be fair, LPMI products tend to be more expensive in a rising rate environment, which we currently find ourselves in, but they are still a relevant option for those who need to preserve cash flow at the front end of their mortgages.
And to show that nobody is exempt when it comes to improving our financial literacy about buying a home, this buyer was in the real estate business himself!
Myth #2: Higher Down Payments are More Cost-Effective.
Not always. I recently worked with an older buyer who initially had a negative perception of MI because he was an underwriter in the 1980s when MI was still an evolving product.
He only wanted to put 10 percent down and was willing to take out a piggy-back mortgage, where two separate liens are put on the same property. However, because of the corresponding loan level price adjustments, the mortgage rate on the first lien was significantly higher than it could have been.
What this buyer did not initially realize is that because of mortgage insurance, which is most commonly used for loans with down payments under 20 percent, pricing improves on loans that meet this 80 loan-to-value (LTV) threshold. You could have two identical buyers in this situation, and the one who uses mortgage insurance is usually going to have better pricing.
The buyer eventually agreed to an MI loan with 10 percent down, which is the most he was comfortable paying to begin with. Additionally, thanks to his strong credit, he also got a lower, tax-deductible interest rate. Had he not used MI, his interest rate would have been 0.25 percent higher and he would have been stuck with this rate until he refinanced.
Steve’s Key Takeaways
The perceptual differences in the above two stories show just how far MI has come.
- You had an older borrower who was distrusting of MI until he realized how these products have evolved, and how much money it could save him.
- And you had a younger buyer who, despite being in the business, was not familiar with the subtle product nuances that could lead to meaningful savings but was open-minded enough to explore that option.
- In both cases, improved financial literacy about a borrower’s available options led to the best possible purchase decision.
When you have a higher credit score, the pricing on mortgage insurance works in the borrower’s favor because monthly mortgage insurance becomes less expensive.
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Read Part 4 of the Unlocking Homeownership Series