“If you don’t read the newspaper you are not informed. If you do read the newspaper you are misinformed.”
Those words of Mark Twain kept coming back to me as I read a couple articles last week touting the concept of avoiding mortgage insurance. One article laid out why 20% down was ideal, the other, a survey that reported that 30% of homeowners delayed or bought a smaller home due to the cost of mortgage insurance. (I’ll allow the lessons learned during the crash of the housing market speak for themselves as to the virtues of buying a home you can truly afford vs. the most expensive home.)
I would however like to take a moment to defend mortgage insurance by examining just what homebuyers are avoiding.
The article I mentioned above talked about 20% being the ideal amount to put down. However, for many ideal and practical are often far apart. National Association of Realtors 2014 Home Buyer & Sellers Generational Trends showed that 71% of first-time homebuyers, and 52% of all buyers, put 10% or less down. We can easily imagine the impact on the housing industry if we remove those homebuyers from the market.
However, what about the impact on the buyers themselves? Of those who decided to put off buying a home? The second article was focused on the last two years, so let’s step back and compare a homebuyer who used MI to buy a home in the first quarter of 2012 compared to someone who decided to wait and save more for a down payment.
(Assumptions: $200,000 purchase in Q1 2012; 5% down payment = $10,000, 720 credit score; 30-year fixed rate = 4.0%)
FHFA Home Price Index shows a national average of home appreciation of 7.1% from Q1 2012 to Q1 2013; and 6.6% from Q1 2013-Q1 2014. But let’s go below the average and use 5%.
The home is now worth $220,500, meaning the person who bought in 2012 and made all their payments has built up over $37,000 in home equity and will be able to cancel their MI in less than two more years (assuming continued home appreciation).
The person who waited? Well at the time they needed to save another $30,000 (assuming they had the $10,000 to put 5% down two years ago) but because the home price went up that savings target is now $34,100. To reach that amount in two years’ time, they now need to save a little over $1,400 every month.
True, their monthly payment will be lower than the homebuyer who bought two years earlier, though with interest rates having risen, the difference is not as much as you might think, especially once the MI is dropped. Plus, they will not have received the two years of tax savings the person who bought the home in 2012 will have been able to take advantage of.
However, most importantly, the person who waited missed out on two years of owning a home and all the benefits that go with why they wanted to buy in the first place, including many quality of life benefits that remain the main reasons why people want to buy a home in the first place, such as place to call their own, raise a family, child’s school district, etc. or the investment benefits.
To me the largest problem with mortgage insurance is how it is presented to the homebuyer. It is always shown as an extra cost. And I understand it is a cost. However, for millions of families it is the difference between getting a home today or waiting years. The key to presenting mortgage insurance is to stay focused on what the homebuyer cares most about…buying a home. Too often avoiding mortgage insurance means avoiding a solution to fulfilling the American Dream of homeownership.
What is your perception of mortgage insurance in today’s lending environment? I would love to hear your thoughts. Please share in the comments.Tags: First-Time Homebuyer, FTHB, Homebuyer, Homeowner, Mortgage Insurance