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Mortgage Insurance Changes and the Prime Minister of India

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Posted 03-23-2013 at 11:06 AM by Roy Sanborn
Updated 03-27-2013 at 08:19 AM by Roy Sanborn (typo)

Mortgage Insurance Changes and the Prime Minister of India

Residential home sales in the Lakes Region towns covered by this report in February were not very spectacular. There were just 46 homes sold at an average price of $268,188 with a median price point of $169,000. We had 59 sales last February but with a lower average price of $209,025 and a lower median price point of $145,000. Sixty six percent of the sales were below the $200,000 mark. It is really great to see the average sales price up for the month and there was a big cheer in the press about it, but on a rolling 12 month basis our average sales and median price is still a bit lower than the previous 12 months. I wish we could get both the ying and the yang going in the right direction every month, but that might be asking for a little too much.

So what is PMI? PMI stands for a lot of things. There’s the Prime Minister of India who everyone knows is Manmohan Singh, a household name... maybe in New Delhi. In business, it stands for Phillip Morris International, in the computer world it can stand for Portable Management Interface, and there are those in certain circles that recognize it as the Plumbing Manufacturers International association. In the wonderful world of real estate PMI stands for Private Mortgage Insurance which is exactly that; a privately issued insurance policy that partially protects the lender who has loaned money to a homebuyer who could not come up with a 20% down payment to buy a home. While PMI is an additional cost, it has helped many buyers get into a home who otherwise would not get a loan. After all, lending someone a couple hundred grand to buy a home when the buyer has only a few thousand dollars, a ball of lint, and a marble collection as a down payment does not seem like a wise investment for any bank or mortgage company.

In today’s market, a majority of the loans we see are FHA and require only a 3.5% down payment. These loans do not have Private Mortgage Insurance, but rather a type of Mortgage Insurance (MI) backed by good old Uncle Sam (MI also stands for Mission Impossible…which it would be for some home owners without it.) Historically, homeowners that have FHA loans and were in their homes for 5 years had been able to get rid of their MI Premium when the value of the property they purchased reaches 78% of the loan (LTV.) That happens as the principal is paid down or when the value of the property increased (remember the good old days?) The problem is that the FHA is still on the hook for the full amount of these federally insured loans even after the MI is cancelled upon reaching that 78% Loan to Value. One government analysis showed that 10-12% of the claims come after the MI is cancelled leaving Uncle Sam holding the proverbial bag of do-do. The “claims” really means that someone lost their house. In order to avoid these losses, any loans registered with HUD after June 3, 2012 will require the borrower to pay PMI for the entire life of their loan. The only exception is if the borrower puts at least 10% down and then the MIP will last for a minimum of 11 years. That may seem like a big deal, but it really isn't as most homeowners will end up refinancing anyway or perhaps even selling and buying another home down the road.

Maybe the bigger news is that as of April 1, 2013 FHA is also going to increase the size of its bite on the Mortgage Insurance Premium by 10 basis points or by .10 percent. Right now, FHA has an upfront MI Premium of 1.75% and a monthly MI Premium of 1.25 %. On a $150,000 home purchase this is what the MI looks like: The buyer is required to have a 3.5% down payment or $5,250 making the base loan amount of $144,750. The upfront MI Premium of $2,533.13 is added to that making the total loan amount of $147,283.13. This is not really an out of pocket upfront cost as it is rolled into the loan so the buyer doesn’t really feel it. The current monthly MI Premium of 1.25% of the loan amount in this case would be $147,283.13 X 1.25% or $1,841 per year or $153.42 per month. After April 1, the rate becomes 1.35% which increases the monthly premium to $165.69. So basically, it’s another $12 out of a buyer’s pocket every month on this size loan. Now that may not be earth shattering by itself, but nothing else is going down in cost either!

What else can you do? There are other options out there such as Rural Development loans which have a 2% upfront “guarantee fee” and only a .40 annual MI rate so that may be a better option for some buyers. There are some programs on conventional loans where lenders pay the PMI but the borrower pays a higher interest rate which can also save you some money. VA loans have no PMI so perhaps you can do a short stint in the Navy, see the world, and then buy a house. To qualify for a lower PMI rate on a conventional type loan you need to have a good credit score and the bigger the down payment you have the better. How do you completely avoid PMI or MI? The best way, obviously, is to scrimp and save to get the 20% down payment that once was the standard for buying a home. Hey, we all know how easy it is to save, right?

Thanks to Jen McCall at Merrimack Mortgage for clarification on mortgage insurance and invaluable insight about Manmohan Singh.

Data was compiled as of 3/18/13 using the Northern New England Real Estate MLS System

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