Ahhh the ever hated PMI on your home loan. The necessary evil. Is it going away?
Private Mortgage Insurance (PMI)? It is (was) an insurance policy required by mortgage lenders on conventional loans when the borrower had a loan-to-value (LTV) greater than 80%. PMI was established to help borrowers with little cash buy or refinance houses. I always called it the necessary evil. The rules were simple. If you didn't have 20% down, you didn't get a loan.
To get the loan, lenders required an extra bit of insurance to protect them, but YOU had to pay for it. The less down payment, the more expensive PMI is as your risk as a borrower went higher.
Then along came 2nd mortgages and home equity lines of credit. With these loans, home owners attempted to skirt PMI by dividing up their loan into two. The first mortgage at 80% loan-to-value or less, and therefore no PMI, plus a second mortgage to cover the difference.
Terms such as 80/10/10, 80/15/5 and 80/20 became common and PMI became an afterthought as people thought they had beaten the lenders. The reality was that for many people, the perceived savings were false, as the second mortgages came at a dramatically higher rate, or with higher risk. I can tell you many stories of people caught with their pants down as the "great rate" on the second mortgage climbed higher and higher. The payments ended up far surpassing the "savings" of avoiding PMI.
OTHER HIDDEN COSTS ABOUND: Most first lien lenders charged you a higher rate on your first mortgage because they knew what you were doing, and you really were not any less risky to them by having two loans. For example, if you had taken a loan WITH PMI, your rate may have been 6.00%, but by doing an 80/10, your first mortgage rate was 6.25%. Also, those second mortgages were never free in terms of closing costs. For many people, the extra closing cost of getting the second mortgage completely ate up all the benefits.
Of course each individual transaction is different, and while some truly gained benefit from two loans, few people ever did the real math to determined the true total cost of their loans over time. Plus, they almost never calculated in the fact that private mortgage insurance can be dropped once your loan-to-value reached 80%.
BEHIND THE MAGIC CURTAIN: Something few borrowers understand about the mortgage industry is who actually underwrites loans. For many companies, the underwriter is actually employed by the private mortgage insurance company, not the actual lender. In simplistic terms, this puts the PMI company on the additional hook for bad underwriting and adds another layer of protecting to the lender. Because of this, while the lenders typically follow Fannie Mae or Freddie Mac guidelines, the PMI company can add their own ADDITIONAL guidelines on top of Fannie and Freddie rules. These additional private mortgage insurance company add on rules have become a major lending industry issue recently, making getting a loan for many, much more difficult.
WHO CAN BLAME THEM? PMI companies are losing $ Billions $ of dollars to lender claims, and 2nd mortgages and home equity lines are a thing of the past, thrusting PMI companies back into the "only game in town" position as lenders look to reduce their risk. I would anticipate within a short-time, that the private mortgage insurance (PMI) companies will not exist as we know them today, throwing further turmoil into the housing market
NO PMI? NOW WHAT? If the PMI companies die, will you be able to get a loan with less than 20% down or equity in the future? Sure, but I would assume that instead of PMI on your loan, you will probably have some sort of lender self-insured policies which will probably come in the form of dramatically higher rates.
We shall see...
What does this mean for homebuyers and homeowners wanting to get a loan with less than 20% equity in the property? MOVE NOW, and be sure working with a professional loan officer who can properly analyze your individual situation and explain current market conditions. This is almost never the guy quoting the lowest interest rate or the guy answering the phone on some big lender 800 phone number.
Call me with any questions you have concerning the current market, but only for properties located in Mnnesota or Wisconsin.