Lenders base all of their rates, terms, and fees on risk. They obviously want to earn money, but more importantly want their loans to be protected so that there is a platform to earn. Much like an insurance company, lenders give out a great deal of money that they have to make sure they can get back and hopefully earn a profit on it. The greater a risk you are by a lender’s standards, the more that you will be charged. This works the same way in life insurance, where someone on anti-depressants gets charged a higher rate. Nobody takes the time to evaluate you on a personal level like in the good days of banks. The theory is that if lenders can succeed based on statistical models of success, then when those models are applied to borrowers without feeling, they will lead to success in reality. Also, in order to uphold equality, lenders are prohibited from basing decisions on personal judgment.
Private mortgage insurance is the result of lenders deciding that they can make money on loans with a down payment of less than 20%. Such a statistical model never used to exist. In fact, couples would rent and save for years to come up with a sizable down payment. Then someone figured, what if we just charge more money each month to insure higher loan amounts? This ushered in the era of 100% financing. All of a sudden, as long as your house appraised for the purchase price, you could get a home with 100% financing. This put a greater emphasis on the appraiser which has held to this day.
Without a 20% down payment, borrowers were forced to pay up to 1% of their loan amounts spread out over a year. For a $100,000, this would mean $1,000 per year. Then, when financing got more creative for lower credit scores, mortgage insurance rates went as high as 2, 3, and even 4% for certain loans. Keep in mind that the average mortgage insurance payment is from .5%-1% of the loan amount per year, although it can range lower and higher. Up until 2007, this payment was not tax deductible, but it has been since 2007.
There are also ways to get rid of mortgage insurance without putting down a large amount. The mortgage insurance can be paid for either in the form of closing fees paid by buyer or seller or by the lender issuing a higher rate. By charging more over time or more up-front, lenders feel that they are compensated for risk. Another way to eliminate mortgage insurance is to get two loans, with one of them 80% of the home’s value, and the other say 20% as an example. The second loan carries a higher interest rate and often includes a “balloon” or extra charge for paying it off before it’s term is up. Mortgage insurance can be requested to be eliminated with 20% equity, but this often requires an appraisal that you may have to pay for. Additionally, with 78% of the balance of the mortgage remaining, mortgage insurance must come off automatically. However, payments must be current, and your payment history must be good. Before mortgage insurance can be eliminated in this way, the loan must be in good standing for at least 24 months with PMI in force.
Mortgage insurance will be around as long as banks feel the risk of their loans necessitates it. As a mortgage officer myself, I have done many 100% financing loans and I have yet to have any of my clients make a late payment. It’s not that because you get 100% financing you will default, it’s that the conclusion is made that such people are not as careful about their payments. There is supposedly evidence of this in the form of statistics, but no argument is fully substantiated statistically. The best relief is in knowing that a home is the best investment you can make, and that on-time payments and profit will eventually make it so that everyone will think you have a sweet deal. I am always open to chatting and giving advice on these things, so please feel free to contact me—my website is below.
http://homeloans.chase.com/brian.b.kerrigan
