Mortgage Insurance: A Smart Option

January 1, 2007

When interest rates start to tick up, potential buyers with limited financial resources—a small down payment or a cap on the monthly payment they can afford—have to reassess what type of home they can afford. As their trusted adviser, you can help them rethink how they want to finance their purchase, since some alternatives have become more attractive in the new rate environment.

Until recently, a popular financing option for low-down payment borrowers was to secure a primary fixed-rate mortgage for up to 80 percent of the purchase price, then obtain a second adjustable-rate, or “piggyback,” loan for the down payment. The advantage to this approach was that thanks in part to historically low interest rates, there was little difference between the rates on first and second mortgages. So combo loan payments were often less expensive than a single loan with private mortgage insurance.

These combo loans aren’t as attractive in today’s uncertain rate environment. But an option that had fallen out of favor during the go-go years of steadily falling interest rates—a single, fixed-rate loan with private mortgage insurance—might now be worth your clients’ attention.

In fact, it’s already drawing interest among borrowers. Nearly 131,000 borrowers opted for loans with private mortgage insurance in September, the most recent data available as of late November, according to the Mortgage Insurance Companies of America, a trade association representing the private mortgage insurance industry. That activity represented a 1.1 percent increase from the previous month and a 16.8 percent increase from the July total.

There are several reasons the fixed-rate loan with mortgage insurance makes sense:

Cost competitiveness.

You might be surprised to find that a single loan with monthly mortgage insurance premiums offers a competitive payment. What’s more, single-premium mortgage insurance—where the full premium is paid at closing and can be financed into the loan—often provides the lowest monthly payment available.

For example, on a $200,000 loan with 10 percent down, a mortgage at 6.8 percent with single-premium mortgage insurance would cost $1,198 per month. In comparison, combining an 80 percent first mortgage with a home-equity line of credit at 9.9 percent would cost $1,217 per month to start, with the possibility that the payment could increase if interest rates continued to climb. A traditional loan with monthly mortgage insurance would cost $1,251 per month.

Possible payment reduction.

Instead of worrying about rising payments, buyers who opt for a loan with mortgage insurance and whose homes appreciate sufficiently to allow cancellation of their mortgage insurance might actually be able to lower their payments or receive a partial policy refund in the case of single-premium mortgage insurance.

Let’s go back to the example used above. If the purchased home appreciated in value an average of 5 percent annually, an assumption in line with the historical performance of real estate, your client who opted for a traditional mortgage insurance loan would be able to cancel the PMI after the third year (upon reaching the 20 percent loan-to-value ratio) and have a reduced monthly payment of $1,095. With a single-premium mortgage insurance loan, the home owner would keep the $1,198 monthly payment, but would receive a premium refund of about $1,400 when the insurance was cancelled. The combo loan payment would still be $1,217—or higher if the rate on the adjustable mortgage goes up.

Easier access to equity.

With both the first and second lien positions locked up in a combo loan, owners who want access to any future equity accumulated in the home for a remodeling project or addition will be hard pressed to find a lender willing to accept the third position. But with a single loan secured by mortgage insurance, a home equity loan may be easier to obtain.

Predictability and security.

With a single fixed-rate loan combined with mortgage insurance, your buyer clients won’t have to worry about increasing payments.

A win-win situation

Those are compelling reasons why your clients and customers should consider mortgage insurance, but there are benefits for you, too.

For buyers who might not qualify for a combo loan, a single loan with mortgage insurance often has fewer conditions on the approval. And there’s only one loan to prepare and close. That means faster, less complicated closings for you.

In addition, armed with all this information, you’ll enhance your relationship with customers and clients. You’ll be able to walk them through the pros and cons of different financing options.

Of course, the buyers will ultimately decide which loan option is best for them. But your guidance will make them feel more comfortable and knowledgeable when they meet with a loan officer.

And that’s just the sort of service that leads to lifetime customers who’ll be with you no matter what type of market you face.

Jim Dinkel, head of FM Lending Services, Raleigh, N.C., is chair of the Strategic Alliance of Mortgage Subsidiaries, a business cooperative of 10 mortgage lenders affiliated with independent real estate companies. You can reach him at jdinkel@fmlending.com.

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