Like me, you probably know a person who has a job that, until you met this person, you never really thought of anyone having that job. For me that person is Jeff.
Jeff sells packaging — the type bakeries use to preserve and display their delectable treats.
One day, Jeff mentioned that he wasn’t sure how I was able to sell mortgage insurance, a product that, at least in his opinion, no one wanted. I informed him that I never made the mistake of assuming anyone wanted mortgage insurance — just like he should understand that no one wants his packaging.
He immediately began to explain how well business was going, how sales were up year-over-year.
“Jeff, your customers don’t want your packaging. They want something that will keep their delectable treats fresh and tempt passers-by, who want attractively packaged, fresh delectable treats. Your packaging is merely a solution to get what they want.”
So is mortgage insurance (MI). Not only does it protect and preserve your product, it also helps your customer achieve what they really want – a home.
But for some reason, consumer advice to “avoid mortgage insurance” persists.
Avoid Mortgage Insurance | Strategy #1
– Put 20% down
First of all, easier said than done. Of course not everyone has the ability to save up for a 20% down payment, and doing this may push back the dream of homeownership a number of years. The nation’s savings rate is somewhere around 5% right now — higher than in recent history. Still, the time it would take to save up 20% for a down payment can be substantial.
Say a consumer is looking to purchase a $200,000 home and has already saved up $10,000. If the consumer is able to put away $500 a month toward the down payment, it will take five years to save up the additional $30,000 — perhaps a little less, depending on the rate of return on savings.
In that same time, at a below-average appreciation rate of 2% per year, the home’s value and purchase price has increased to $220,000, meaning the 20% down payment is now actually $44,000.
(Plus, who knows where interest rates will be then. It’s hard to imagine they’ll be lower than today.)
Had the consumer put 5% down and used mortgage insurance, she or he would have:
• Been able to enjoy the home over the last 5 years
• Built up more than $45,000 in home equity
• Possibly been able to cancel mortgage insurance — right about the time he or she would otherwise be looking to purchase with a full 20% down payment and without mortgage insurance
Avoid Mortgage Insurance | Strategy #2
– Use a piggyback loan
Piggybacks were all the rage at the height of the mortgage boom.
It worked, in theory, by taking out one mortgage at 80% of the home’s purchase price, and simultaneously taking out a second mortgage.
The problem was it didn’t always work.
First off, the interest rate on the second mortgage was usually much higher than the first mortgage, reducing equity build up.
Second, at the rate homes were appreciating, a homeowner would have been able to cancel mortgage insurance in less time than in normal markets, whereas the second mortgage needed to be either paid off or refinanced.
Once the housing market turned, and homeowners fell on difficult times, many were unable to get the help they needed because of the difficulty trying to rework the second mortgage.
Sadly for many who lost their homes, if they had financed one mortgage using mortgage insurance, they may have been able to better qualify for a loan modification and preserve their homeownership. A second mortgage sometimes complicates this because the owner of the second and the first mortgages are often not the same.Mortgage insurance aligns the interests of both the lender and the borrower.
Avoid Mortgage Insurance | Strategy #3
– Finance through FHA
FHA is a good program and plays a vital role in the mortgage industry. However, make no mistake,
FHA financing includes mortgage insurance. It’s simply mortgage insurance provided by the government.
In today’s market, FHA loans often receive a lower interest rate than conventional loans financed with private mortgage insurance, commonly known as PMI. However, the mortgage insurance premiums (MIP) on 30-year FHA loans are almost always higher than private mortgage insurance premiums.
FHA charges an up-front premium that homebuyers pay at closing or finance into their loan amount and increase their debt.
FHA’s minimum down payment amount is 3.5%. Currently the up-front premium is 1.75%. By financing the premium, the homebuyers essentially cut their down payment in half.
Private mortgage insurance offers premium options, many of which do not include any up-front premiums, minimizing the amount of cash needed to close.
FHA’s premium is usually priced higher than private mortgage insurance companies like MGIC, meaning the homebuyers will pay more— often much more — using FHA mortgage insurance. And, unless they put at least 10% down, their monthly mortgage insurance payment can not be cancelled, unlike private mortgage insurance.
Again, this is not to say that FHA is bad. It isn’t. It is an option that helps many families each year buy a home, which is wonderful. However it is still mortgage insurance, and in most cases, if homebuyers are able to go with conventional financing, the better off they will be.
Focus on the Want
As mortgage professionals, we will probably always have consumers and real estate agents approach us with the mindset of avoiding mortgage insurance.
My advice is to help them understand that it really isn’t about mortgage insurance. It’s all about what the customer truly wants. If that’s a home sooner rather than later, along with affordability and flexibility, private mortgage insurance may be the best choice.Tags: First-Time Homebuyer, Mortgage Industry, Mortgage Insurance, Real Estate, Top Content