Private Mortgage Insurance Making a Comeback

Published by nora | Filed under Buyer / Seller Tips, Market Trends, Miscellaneous, Mortgage / Finance, Real Estate, Shout Outs

You now have another option to finance your home purchase aside from using a FHA loan or a 20-percent down conventional loan as private mortgage insurance is now being offered again.

Lenders require PMI if the down payment is less than 20 percent of the loan amount as they want to make sure their loss is covered in case the borrower defaults. Now that PMI companies are offering insurance again, buyers can now take out a conventional loan with lower down payments.

Last year, prospective buyers who wanted to buy a home using a conventional loan with a down payment below 20 percent could not find an insurer willing to provide PMI. The mortgage market was then so unstable that PMI providers refused to give insurance.

Now that the housing market is improving, at least three mortgage insurance firms – MGIC, Radian Guaranty and Genworth Financial – have started offering PMI again and have even relaxed some of their rules. They have removed some of their geographic restrictions and are now accepting borrowers with down payments of as low as 5 percent.

The country’s biggest private mortgage insurer, MGIC, has even decided to lower its rates for borrowers with a FICO score of 720 or higher to be more competitive with FHA insurance rates. However, for borrowers with a FICO score between 680 and 719, the rate remains the same. For those between 620 and 679, the rate has been increased.

For a $417,000 home loan, the average PMI premium is 0.62 percent, which is equivalent to an annual premium of $2,585.40 or a monthly premium of $215.45.

A large number of homebuyers prefer a low down conventional loan with PMI over a FHA loan because they save several thousand dollars in upfront FHA fees with PMI loans. The FHA charges an upfront fee of 2.25 percent in addition to the monthly premium of around 0.50 percent.

In addition, borrowers can cancel their private mortgage insurance once they reach the 20-percent threshold. FHA, on the other hand, requires borrowers to pay their mortgage insurance premiums for five years.

There are also lenders who are willing to pay the private mortgage insurance if the borrower agrees to an increase in the interest rate by one-fourth of one percentage point. This is called lender-paid PMI, which can cut down monthly premium costs by 50 percent.

Furthermore, there are also private mortgage insurance firms which cover 100 percent or a portion of the monthly home loan payments of unemployed borrowers for a certain number of months.

However, for borrowers who are unable to make down payments above 5 percent or whose FICO scores are below 680, FHA may be their only home loan option.