Private Mortgage Insurance (PMI) helps first time home buyers purchase a home with less than 20% down. Because of PMI, conventional financing is often a better deal than FHA.
According to Wikipedia, Private Mortgage Insurance is “insurance to offset losses in the case where a mortgagor is not able to repay the loan and the lender is not able to recover its costs after foreclosure and sale of the mortgaged property.”
Home buying season approaches
As spring home buying season approaches, borrowers, lenders and real estate professionals should take a fresh look at using private mortgage insurance for the purchase of a home with less than a 20 percent down payment rather than FHA Insured Loans.
Effective April 1, 2013, FHA increased its mortgage insurance premiums for the third time in two years, raising the average borrower’s required mortgage payment by approximately $130 a month.
FHA loses ground as preferred option
In recent years, loans guaranteed by the Federal Housing Administration (FHA) were the preferred option for first-time and low-to moderate-income borrowers. However, the reality is that for nearly all borrowers who can make more than a 3.5 percent down payment on a loan up to $417,000, private mortgage insurance now is significantly less expensive than FHA, making it the smarter, more affordable financing option for many borrowers according to Genworth Financial, a major PMI provider.
3% Down Conventional Loan
There are also cases of lower down payment with conventional financing meaning lower payments, depending on credit score. Credit score is a huge determining factor when deciding on mortgage insurance. Take a look at the comparison chart with 3% down conventional versus FHA 3.5% down. Even the monthly mortgage insurance and higher payment with the 97% loan will save money over the course of the loan and the split MI starts saving right away.
Critical time in housing recovery
FHA’s higher fees affect all purchase loans and come at a critical time in our housing recovery. Analysts predict refinance activity will wind down in the second half of 2013, just as higher FHA pricing begins to impact the recovering home purchase market.
How much money can borrowers save by going with a private mortgage insurer like Genworth U.S. Mortgage Insurance? On a $170,000, 30-year loan, borrowers choosing FHA would have to pay nearly $3,000 more upfront than the comparable Genworth coverage on a loan with a 5 percent down payment, due to FHA’s required 1.75 percent upfront premium. And this is in addition to FHA’s higher monthly premiums. In that same scenario, a borrower with a 760 FICO score who puts at least 5 percent down would save at least $77 per month using Genworth over FHA. Taken together, the borrower using Genworth mortgage insurance would pay at least $8,600 less than a borrower with an FHA loan over a five-year period. (Comparison courtesy of Genworth Financial)
FHA Ending MI Cancel-ability
In addition to the price increase, FHA has announced that beginning June 3, it no longer will cancel collection of MI premiums on 30-year loans with a loan-to-value (LTV) ratio above 90 percent. In the past, borrowers using FHA were allowed to cancel annual insurance premium payments once their debt fell below 78 percent of the original principal balance. Now, FHA will require borrower to pay mortgage insurance premiums for the life of these loans.
In contrast, Genworth mortgage insurance remains cancel-able. With an appraisal, Genworth MI can be canceled when borrowers reach 20 percent equity if they are current on payments and other requirements are met. And borrowers are eligible for automatic termination when the loan amortizes to a LTV of 78 percent, if they are current on payments and other requirements are met. In a market where home prices are beginning to increase, this is an attractive benefit of private MI, providing borrowers with another potential monthly savings differential that could last for many years.
Private Mortgage Insurance - Clear Choice
These changes have made the choice between private mortgage insurers like Genworth and FHA clearer than ever before. PMI is the winner on price in most instances, and can be canceled when the borrower meets certain criteria. By contrast, the FHA is raising rates and ending cancel-ability. As the housing market stands poised to again fuel our nation’s economic recovery, private mortgage insurers like Genworth are helping put more individuals in their homes – for less – every day.
Editor’s Note: The interest rates used in the attached charts are not intended to advertise a specific rate, but are to be used as an example of the difference in FHA and conventional financing only. This should not be construed as an offer of an interest rate for a specific property/loan. Additionally, payments quoted do not include taxes, insurance or HOA dues.)
About the author: Fred Chamberlin is a senior loan officer with Guild Mortgage Company in Oak Harbor. He has been in the mortgage origination business for over 20 years and in the lending business for over 30 and authors a number of mortgage related blogs.
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