NEW YORK (MainStreet) — Don't sell the impact of mortgage insurance short, even though many American homebuyers apparently do.
A study by TD Bank reveals that 65% of people who bought a home in the past 10 years said their mortgage insurance (often referred to as private mortgage insurance or PMI when Uncle Sam isn't involved) left them paying a higher monthly mortgage payment than they expected.
PMI is usually required from a lender if a borrower cannot put 20% down, in cash, to buy a home. TD Bank notes that the average mortgage insurance cost per month is $100, which often runs through the entire life of the loan for U.S. Federal Housing Administration home loans (which require lower initial down payments from borrowers.)
In the case of non-FHA private mortgage lenders, mortgage borrowers usually pay PMI monthly until they have accumulated enough equity in the home that the lender no longer considers them high risk — usually when they reach 20% equity in the home.
"PMI has had a definitive impact on many homebuyers — including making them rethink or delay the purchase of a home in light of not being able to meet monthly mortgage payments," says Michael Copley, executive vice president of retail lending at TD Bank.
But this week, the FHA announced mortgage guidelines reducing minimal down payments to 3% from 5%, financial website WalletHub reports. The firm says now is a good time to get up to speed on mortgage insurance, and what it can mean to the overall cost of your new home mortgage.
With the new FHA mandate in mind, here are five mortgage loan details WalletHub thinks are worth highlighting:
Premiums have surged. FHA mortgage insurance premiums have nearly doubled since 2008. Someone who buys a median-priced home now has to pay $17,398 in premiums during the first five years, compared with just $9,210 in 2008.
Insurance rates are declining. Private mortgage insurance rates have been in decline this year, sliding by an average of 3.36% across all credit scores. The biggest drop (11.36%) has been for buyers with a credit score of at least 760 who are making a 90% loan-to-value purchase.
More low-down-payment options are coming. Although some PMI lenders will now insure 97% loan-to-value (or higher-risk) loans, only 12% of banks offer conventional loans with such a low down payment, WalletHub says. "New mortgage guidelines are expected to significantly increase the availability of low down payment home loans," the firm says.
FHA insurance payments go on and on. Unlike private mortgage insurance, FHA premiums continue to be assessed throughout the life of a loan, even if your loan-to-value ratio drops below 80%. "That can create huge cost disparities over time," WalletHub says.
WalletHub also points out that even with a low down payment, you shouldn't ignore private insurers. Mortgage borrowers with down payments below 20% can save from $2,251 to $12,026 in just five years by choosing private mortgage insurance instead of an FHA loan. But there is a catch: Private lenders love low-risk borrowers, so you'll need good credit. "The higher their credit score and down payment, the more potential savings," WalletHub says.
WalletHub also offers some tips for hunting low down payment mortgages:
- Ask your mortgage lender about both FHA and private mortgage insurance options if you have less than 20% to put down.
- There is considerable variation in the lowest credit score and lowest down payment each bank will accept, so shopping around for the most affordable mortgage for your specific financial profile is very important.
- The fact that consumers are generally stuck with their lender's PMI company of choice is another good reason to shop around at several lenders to make sure you are getting the best loan terms and the best deal on mortgage insurance.
- When comparing FHA and private mortgage insurance costs, be sure to include FHA's up-front mortgage insurance cost, which is typically financed into the loan amount.
- Remember that FHA premiums apply throughout the life of the loan, while PMI can be canceled once your loan amount reaches 78% of your home's value, which can happen only a few years into the loan.
Above all, hiking your credit score to 680 or above may be the best move you can make to lock down an affordable, low-down payment loan. Do that and you've made major progress in beating back the high costs of mortgage insurance once and for all.
— By Jerry Kronenberg for MainStreet