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This “boring” topic could be worth thousands to your clients

by Peter Thomas Ricci

corelogic-cash-sales-homes-real-estate-market-national-october-2015

We know, we know – private mortgage insurance (PMI for short) is one of the more profoundly unsexy topics in real estate, and offers little of the glitz and glamor of staging, showing and negotiating.

But it is a topic both you and your clients should be well-versed in, especially if your client will be putting less than 20 percent down on their home. Lenders generally have a PMI company of choice – meaning that your clients are stuck with that PMI provider, based on lender – so you’ll do your clients a world of good by informing them about the various costs of PMI as they compare lending options for their home.

Here are the two major considerations when advising your clients on PMI:

1. PMI Rates are Flat – It may be surprising to learn, but it’s the truth – all the major PMI providers charge the exact same rate for their mortgage insurance. Based on a recent analysis from WalletHub, here is how it breaks down:

PMI Provider 3.5% Down 5% Down 10% Down
Genworth 1.90% 1.42% 1.00%
Radian 1.90% 1.42% 1.00%
Essent 1.90% 1.42% 1.00%
MGIC 1.90% 1.42% 1.00%
Arch 1.90% 1.42% 1.00%
National 1.90% 1.42% 1.00%

PMI all but disappeared during the housing downturn as lending standards skyrocketed and the FHA became the major source of financing for lower-income borrowers. With FHA mortgages growing more expensive in recent years, however, PMI has returned to the fray.

2. The FHA/PMI Divide – What if your client is deliberating between an FHA mortgage or one with a private lender? The answer to that question will depend considerably on their credit score and the size of their downpayment.

As our interactive chart below demonstrates, homebuyers with lower credit scores benefit from an FHA mortgage, because the mortgage insurance on FHA products is fixed across the credit spectrum; that is especially the case for buyers with lower down payments. Just as that is true, however, so is the inverse – for buyers with better credit scores and larger down payments, private insurance is the way to go.

Credit Score 3-Year FHA Costs 3-Year PMI Costs 3-Year PMI Costs Savings
760 $8,801 $3,377 $5,424
720 $8,801 $5,833 $2,968
680 $8,801 $8,596 $205
660 $8,801 $11,667 -$2,865
620 $8,801 $13,816 -$5,015
Credit Score 3-Year FHA Costs 3-Year PMI Costs 3-Year PMI Costs Savings
760 $8,362 $2,478 $5,884
720 $8,362 $4,413 $3,949
680 $8,362 $6,528 $1,834
660 $8,362 $8,584 -$222
620 $8,362 $9,732 -$1,370
Credit Score 3-Year FHA Costs 3-Year PMI Costs 3-Year PMI Costs Savings
760 $7,922 $1,718 $6,204
720 $7,922 $2,863 $5,059
680 $7,922 $4,180 $3,741
660 $7,922 $5,727 $2,195
620 $7,922 $6,299 $1,623

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