When is 15 greater than 20? It sounds like a riddle, but the answer is no joke.
In past posts, I have expressed my continued frustration about media stories perpetuating the utterly false mortgage myth that you need to put 20% down when buying a home.
I get so frustrated because I believe these stories cause some people to delay buying a home when they could afford to buy now. This popular media narrative leads them to delay their dreams as they scrape and scrimp to reach this mythical threshold, watching home prices and interest rates continue to rise while they wait.
That’s why we created our popular Buy vs. Wait calculator on our new consumer site, Readynest, to address this mortgage myth and help better educate your would-be homebuyers who wait on the sidelines.
But there’s another group who can benefit greatly from mortgage insurance – borrowers who have a 20% down payment. I know what you’re thinking:
“Borrowers who have 20% to put down when buying a home don’t need MI!” That’s true – but what they do need is for you to show them why they may want MI.
Why 15% > 20%
It may seem counterintuitive, but putting 5% less down (15% instead of 20%) can have many advantages for borrowers.
To start with, Fannie Mae’s loan-level price adjustments and Freddie Mac’s credit fees are .25% lower at the 85% LTV level than the 80% LTV level. Why? It’s simple: MGIC mortgage insurance reduces their exposure to credit risk.
So, to get the same interest rate at 85% LTV that the borrower would pay at 80% LTV, the borrower actually receives a .25% discount on closing costs. That discount provides a lot of options for your borrowers. They could:
- Reduce the cost of the premium on MGIC’s borrower-paid, non-refundable single – cutting the rate by roughly half for those with higher credit scores.
- Lower their interest rate on the 85% LTV loan. This is a great option to discuss as rate sensitivity among consumers is rising along with rates. However, to lower the interest rate by .125%, they may have to pay slightly higher closing costs than they would have at the 80% LTV level (an additional .25% compared to the closing costs of the 80% LTV loan option).
- Lower their closing costs and take advantage of MGIC monthly MI. With this route, the borrowers also reap the advantage of MI cancellation when the loan either reaches the cancellation point due to amortization of the original loan amount or the borrowers request cancellation based on a new home value due to appreciation or home improvements.
Show me, don’t just tell me
Our webinar on this topic runs through examples in more detail. However, to better illustrate my point, assume for a moment you have a couple who comes to you looking to purchase a $300,000 home. Through savings, the sale of a current home, a gift from mom and dad, or other means, they have managed to come up with a 20% down payment. In this scenario, that’s a sizable down payment of $60,000. Now imagine showing them how, for an increase of less than $100 on their monthly payment and a little more due at closing, they could keep $15,000 of their hard-earned cash!
Here’s what I’m talking about:
Assumptions: The property is an owner-occupied, primary residence. The MI rate is based on a 30-year fixed-rate loan with a 5% interest rate, priced at 0 points; a 760 credit score; 2 borrowers; and a total DTI ratio of 45% or less. This example is meant for mortgage professionals and illustration purposes only.
*For all mortgages except HomeReady® and Home Possible® loans.
**Based on rates effective July 9, 2018. Numbers and calculations are rounded to nearest dollar and may vary slightly from actual results. This example is for illustrative purposes only. It does not in any way guarantee specific MGIC premium rates or our approval of any loan for insurance. Our mortgage insurance rates are subject to change, availability in each state, individual state laws and licensing agreements.
In this example, for just $81 extra a month and $485 more due at closing, the borrowers keep $15,000 in savings. If they were to save $81 a month, it would take this couple more than 15 years to replace the additional $15,000 they would have put down if they chose a 20% down payment instead of 15%.
So, who would want MI if they have 20%?
MorStatMI™ data tells us that 31% of purchase loans in 2017 were done at LTVs of 75.01%-80%. That’s a big target audience for this message!
I could go on and on, but here are just a few types of borrowers who may like the idea of putting down 15% instead of 20%:
- Borrowers who don’t want to deplete their entire savings and would like the peace of mind of retaining a robust emergency fund
- Borrowers who plan to purchase new appliances or furnishings for their new home or make renovations, which may mean more debt (Did you know homebuyers on average spend $8,233-$10,601 on appliances, furnishings and property improvements within the first year of closing?1)
- Borrowers who had to take money out of retirement in the past and want to rebuild their nest egg
- Borrowers with older children who may need money soon for college tuition
What’s in it for you?
Not every borrower who has saved enough for a 20% down payment will want to use this strategy. You’ll want to make it clear that, in the end, you have no vested interest in the route they decide to take.
However, borrowers will likely appreciate the loan officer who took the time to provide a thorough review of all their options, regardless of which one they chose.
This strategy can also yield results for those looking to build or enhance their relationships with financial advisor referral partners. By sharing a strategy that frees up a large sum to invest, you can give them another way to demonstrate their ability to help their clients make money.
Your next step
Download: 15 > 20 Mortgage Infographic
This mortgage infographic will help you explain the benefits to the right borrower about why they may want to only put 15% down, instead of 20%.
1National Association of Home Builders special study, Spending Patterns of Home Buyers, July 2017
HomeReady® is a registered trademark of Fannie Mae.
Home Possible® is a registered service mark of Freddie Mac.
MorStatMI™ is a trademark of Geosegment Systems Corporation.
Tags: housing, Housing Finance, Mortgage Industry, Mortgage Programs, Mortgage Strategies