Mortgage Guaranty Insurance Corporation (MGIC) announced on June 7th that they’d be offering a Spanish language version of Buyer’s Ed, their online homebuyers educational program. Buyers Ed in English and Buyers Ed in Spanish are entirely free and offer a free five part crash course in learning how to buy a home. Considering the price and the fact that you don’t need to provide any personal information, it’s a great resource. If you happen to be working with a lender that requires “homebuyer education certification,” this self-paced course also has a certificate of achievement than you can send to the lender after you finish the Buyers Ed test. It’s a win win situation.
On Tuesday, the House of Representatives passed HR2486 which increased the Department of Veterans’ Affairs’ home loan guarantee program. The current program guarantees 25% of a qualified veteran’s mortgage loan up to $240,000 (or a guarantee on $60,000). Currently, this means is that up to the first $60,000 of the loan is guaranteed by the government and now the eligible veteran no longer needs private mortgage insurance. HR2486 increases the limit from $240,000 to $333,777, or a guarantee of $83,245, and it indexes it with inflation.
Why can veterans now avoid private mortgage insurance? It means that the veterans can now go apply for and hopefully be awarded a VA guaranteed loan, which can be used as a down payment, and thus avoid private mortgage insurance. With a $83,245 loan as a down payment, you can buy as much as $416,225 worth of house without paying private mortgage insurance. While the bill is likely to be signed and passed into law, the current limit of $60,000 means a veteran could still buy $300,000 with nothing down and still not pay private mortgage insurance.
Whether or not this is a good decision is another discussion altogether (if you can’t make any down payment and need all $60,000 should you be buying $300,000 worth of house?) but this does avoid private mortgage insurance.
If you’ve reached a LTV ratio of under 80% (i.e. paid off more than 20% of your mortgage) then you are now eligible to get private mortgage insurance cancelled without question. In fact, if you’ve paid off more than 22% the cancellation should be automatic but you can never be too certain (banks are sneaky!). Often, if you have reached 20% your mortgage lender will require you to contact them directly to get the private mortgage insurance cancelled. Sometimes, a phone call will be sufficient but more often than not they will require a written request. Below you will find a sample letter to cancel your private mortgage insurance:
Written Request to Cancel Private Mortgage Insurance
Today’s Date
Lender’s Name
Lender’s Address
City, State ZIP code
Dear [Lender]:
This letter is a written request to cancel private mortgage insurance on loan number #[mortgage loan number] for the property located at [your street address, city, state and zip code] as I believe I have satisfied the requirements for cancellation as written in The Homeowners’ Protection Act of 1998. If I am not eligible for private mortgage insurance cancellation, please contact me with regard to which requirements I have failed to meet for cancelling the private mortgage insurance. I may be reached at [your current mailing address and telephone number] and request that you contact me with the status of my request as well as whether you require further documentation to proceed.
Regards,
Your Name
As an astute consumer, one of the things you’ll want to do is check out the various mortgage insurance underwriters and shop for the best price. If you approach your loan officer with this proposition, he or she will likely tell you that you actually can’t shop around for private mortgage insurance. It’s probably going to stun you because shopping around is what makes competition and free markets great, but your loan officer is right. You can’t shop around because the lender usually applies for you but even if you could, it wouldn’t matter. The quote you get from one company will differ very little from a quote from another company because they run solely on numbers. In fact, the competition you would expect to find lowering prices actually raises them because of a well known economic theory.
It’s called perverse competition and it occurs when a company offers a product that can only be sold with another, much bigger, product. In this case, the smaller product is mortgage insurance and the bigger product is the mortgage itself. Now, what happens is all these mortgage companies now compete against each other to win the favor of the mortgage companies - which in turn increases their costs. So, in this situation, competition has increased prices for the end consumer. That ends the elementary economics lesson.
The average 30 year fixed rate mortgage has reached 6.67%, over a full point higher than a year ago when it sat at 5.62%. This was caused by inflation concerns voiced in the Federal Open Market Committee minutes that were released today. As a prospective homebuyer, should be happy rates are higher or lower? While you may curse higher interest rates, you’ll be surprised to know that you’re probably better off from a private mortgage insurance perspective. If you’re a homeowner, this is bad.
Why is this good as a buyer? When mortgage loan interest rates go up, it usually means that the housing market will begin to cool off. That means that prices will stagnate and even potentially fall, which means the money you’ve saved for a future home purchase will represent a greater percentage of the price. If you’re luckily enough to have prices dip low enough such that your loan to value is under 80% - you’ve just escaped PMI.
If you’re a homeowner paying PMI - this is bad. If your home value increases, your loan to value ratio will decrease. At some point, it’ll be worth it for you to get your home reappraised by an agent hired by your mortgage lender and if the LTV is under 80%, then PMI will be cancelled. Now, as mortgage interest rates increase, the market will slow and home prices won’t appreciate as quickly so that method of having your PMI cancelled won’t be as easy.
The IndyStar.com, in their May 21st 2006 edition of their Your money column, asked several industry experts whether or not “no down payment mortgages” were worth it. The resounding response was …. “it depends.”
Julie Scheers, Bedel Financial Consulting mentions the two types of no down payment mortgages - piggybacks (80-20) and 100% LTV loans (which would require private mortgage insurance). She also smartly mentions that the savings can and be used to pay down the balance or saved in a 401(k). She also smartly warns that if you’re looking at zero-down-payment because you don’t have the discipline to save, you should get your finance sin check first.
Scott K. Ferguson, Halter Ferguson Financial brings up the statistic that 10 years ago, the average down payment was 20% of the selling price. Now, lenders advertise mortgages with 5% to zero down payment. He also brings out actual numbers with respect to how much PMI you’d pay.
The smaller the down payment, the higher the mortgage insurance. A zero-down $100,000 mortgage would have a $1,090 annual PMI premium, amounting to $91 per month more.
Bryan K. Hanner, Hanner Financial Services reminds everyone of the financial pitfalls of a small or zero down payment. A larger percentage of your payments go towards interest and not principal, so you’re not paying off the loan as quickly. He also says that most of the homes he’s seen being promoted as no down payment are in areas where the home is overpriced. Plus, if you’re that strapped for money, you should remember there are maintenance and utility costs associated with owning a home outside of the mortgage payment.
Overall I think this “debate” covers a lot of good ideas and thoughts very lightly and that you should do more research to figure out if the decision is right for you.
Unfortunately they are not. You can’t write off private mortgage insurance payments on your income tax return. It joins the class of payments you’ll make that aren’t tax deductible and they include your homeowner’s insurance payments, homeowner associate dues, any local or county dues, extra payments on the principal, maintenance or repairs. The fact that it’s not tax deductible is one of the reasons why people sometimes consider piggyback mortgages.
Unfortunately, you can’t negotiate your PMI rates but there are other strategies you can employ to avoid PMI altogether (such as obtaining a piggyback mortgage).
The reason you can’t negotiate your PMI premium rates is because the lender that is requiring you to get it isn’t the one setting the rates. They’re getting a quote from one of major private mortgage insurance underwriters and the rates that the PMI underwriters are quoting are based strictly on your credit, down payment amount, and a few other factors. Since the lender doesn’t set the rate, you can’t negotiate with them, and since the PMI underwriters are dealing strictly with numbers, there isn’t any wiggle room their either because you can’t make two underwriters fight for your business.
What you can do, though, is negotiate other aspects of your home purchase such as title research fees, loan origination fees, homeowner’s insurance and the like but private mortgage insurance has little room for adjustment.
I’ve frequently mentioned how I like a piggyback mortgage over PMI because the extra payments (the interest on the second mortgage) but for today I will play devil’s advocate and try to argue the case for PMI and in what situations PMI makes more sense:
Adjustable Rate Second Mortgage
If you are faced with no choice but an adjustable rate second mortgage (as some second mortgages are), you will always want to go the route of private mortgage insurance. The piece of mind you get from knowing your PMI payments will never go up, especially in our rising rate environment, is something that outweighs the fact that it cannot be deducted from your income tax. You may plan to pay off the second mortgage ASAP and thus avoid the hassles of getting PMI cancelled (though that has been made much easier with recent legislation) but if something unforeseen happens - you could be in big trouble if the rate is reevaluated upwards.
One Mortgage, One Payment, One Hassle
Two mortgages means double the payments, double the paperwork, and when it times to do your taxes, double the forms and calculations. If you have everything deducted automatically from your bank, then you don’t have to worry about the double payments but you will have to worry about the rest. PMI isn’t so expensive that it’s worth the time and effort to bother with the additional work.
PMI Cancellation Is Easy Now
It used to be that lenders and the underwriters would make it a pain to get PMI cancelled. Some had rules where you needed to keep PMI on for a minimum of one year, some made you jump through all sorts of hoops, and after you recited the secret code word… they’d cancel your private mortgage insurance payments. Now, with The Homeowner’s Protection Act of 1998 it is automatic when the Loan To Value is under 78% and can be cancelled with a little bit of prompting when it’s under 80%.
So, PMI isn’t that bad. 
So you need to borrow more than 80% of the value of the house and you’re wondering how you apply for private mortgage insurance right? Don’t, the lender will apply on your behalf with one of the major PMI underwriters. You never need to personally apply for private mortgage insurance.
Does this mean that you won’t be able to compare rates? Yes, it means you won’t be able compare rates and pick the best one but they’re all pretty much the same so it won’t make much of a difference. Your time is better spent looking at and negotiating the other aspects of your home purchase such as the title insurance, home inspection, and other contingencies. Also, understanding any favorable tax laws can save you more money than the small percentage points of PMI, at least in the short term. Good luck!