Mortgage Insurance: The Right Choice in Today's Market

Bubble burst, market readjustment, return to more prudent lending standards? Regardless of how you label it, the mortgage market is undeniably changing. That's why it's more important than ever for homebuyers to understand their options when shopping for a mortgage.

During the housing boom there was a fundamental shift in how people evaluated their mortgage options. Where the emphasis used to be placed on the long-term viability of the loan, many homebuyers became more focused on keeping their monthly payment as low as possible. In turn, lenders offered a wide variety of loan types designed to give customers the options they were looking for.

One of the most popular loan programs was the piggyback loan. These programs featured a first mortgage covering 80 percent of the purchase price. The remaining 20 percent of the loan was covered by a combination of a second lien, which can either be a closed end loan or most frequently taking the form of a home equity line of credit, and a partial down payment (typically between 0-15 percent). By doing this, borrowers were able to avoid private mortgage insurance (MI), which is generally required on mortgages with less than a 20 percent down payment.

For more than 50 years, the mortgage insurance industry has played a vital role in the U.S. economy for aspiring homeowners, lenders and investors. The record levels of home price appreciation and a strong sellers market helped veil the benefits of MI during the boom. However, the recent mortgage market challenges have demonstrated the critical importance of dependable credit enhancement, which the mortgage insurance industry has traditionally fulfilled.

By sharing a lender's risk of loss if a property goes to foreclosure, MI allows lenders to offer more loans with reduced down payment requirements and competitive interest rates. From the homeowner's perspective, MI allows a buyer to purchase a home with as little as 3 percent down. That gives them the flexibility to buy sooner or leverage their down payment to purchase a larger home.

As the market winds have shifted, MI is quickly becoming the smart choice for many prospective homeowners. MI offers low-down payment, fixed rate mortgages that give borrowers both an affordable monthly payment and the security of knowing their payment will never increase. Those are the building blocks of successful, sustainable homeownership. As the property appreciates over time, the homeowner may even be able to reduce their monthly obligation as MI is cancelable.

That's not to say that mortgage insurers aren't making their own adjustments given the current market. Like lenders, mortgage insurance companies have tightened their underwriting guidelines to better reflect the risks in the market place. Changes have included income verification, proof of employment and prudent past credit behavior, as well as more "skin in the game" for qualified borrowers in the form of higher down payments. (i.e. a minimum of 3-5 percent down payment.)

Another important change to mortgage insurance comes from the Federal government. Under a new law, borrowers closing loans to purchase homes through 2010 who have an annual household income of $100,000 or less will be able to get a low-down payment mortgage and deduct the full cost of their mortgage insurance premiums on their federal tax return. This is another example of how mortgage insurance has become more competitive with piggyback lending structures.

All of these changes are consistent with the founding principal behind mortgage insurance; help families achieve and maintain the dream of homeownership. After all, with foreclosure no one wins.

Just as no single house is right for every homebuyer, no single loan product is perfect for every borrower. As a Realtor, you can serve your customers well by recommending that they work with a reputable lender to explore all of their financing options.

Contact Carl Henker at:
530-781-1719 or cell 530-519-1070 and [email protected]