Q: We signed a contract to purchase a condominium for $90,000. The lender for the project is prepared to offer us a loan at an interest rate we believe to be competative in the Washington area -- if we put down 20 percent of our own cash into the purchase. The lender is suggesting that if we want to put down only 10 percent, we could get a loan, but it would be insured by a private mortagage company. We will have to pay penalty for this coverage and wanted your suggstions as to which way to go. Exactly what is private mortage insurance?
A: Private mortgage insurance is a guarantee to a mortgage lender that the full amount of the loan will be protected in the event a foreclosure sale does not bring in enough money to pay off the outstanding loan.
Traditionally lenders have wanted a down payment of up to 25 percent of the purchase price. The theory of such a large down payment is that if the borrower is unable to make payments, and if the house has to be sold at a foreclosure sale, that sale would at least bring in enough money to pay off the outstanding loan.
But,, as homes became more and more expensive, many people could not afford a sizeable down payment. Thus, the Veterans Administration inaugurated the concept of a guaranteed loan, whereby the VA would insure the lender that the top portion of the loan would be protected in the event of foreclosure. The VA does not make loans, but insures the lender, and thus enables the veteran purchaser to obtain a house with a low down payment or even a no-down arrangement.
In 1957, the modern private insurance industy was founded, with the incorporation of the Mortgage Guarantee Insurance Corp. (MGIC). Thus the term "magic loan." Since that time, especially in the mid-1960s to the early 1970s, many private mortgage companies came into being.
I don't consider the premium that you pay for the private mortgage insurance a "penalty." Even if you are able to afford a conventional mortgage -- thereby putting down 20 percent or more -- you still might want to select a 90 percent financing management.
As I have said in the past, the less money you put into your house, the better off you are, especially in light of our inflationary economy. In the financial world, this concept is known as leverage and why shouldn't the average homeowner take advantage of the same economic principles??
As long as you are able to afford the monthly payments, and have been given an opportunity to shop around for all of the terms of your mortgage,, you will be in a better position to make up your mind about what kind of loan to take.
I recently learned an interesting fact about the private mortgage insurance industry: Borrowers who need private mortgage insurance have the right to shop around for an insurer, just as they have the right to shop around for a mortgage lender.
There is some competition developing within the private mortgage insurance industry today. Some companies are offering better terms for the borrower but unless you ask your lender, you will never be able to compare.
Generally speaking, the lender arranges for the private mortgage insurance often tapping their own friends. But, before you commit yourself to a particular type of loan, call a number of private insurance companies to determine their rates. If you are pleased with one of those companies, insist that your mortgage lender utilize the services of that insurer.
Before you go to settlement, find out the specific terms and conditions upon which your private mortgage insurance premiums will cease. Get this statement in writing from the lender so that there will be no mistakes or confusion later.
Theoretically, private mortgage insurance is not needed when the loan is amortized down to 80 percent of the value of the house. But does your lender consider "value" to be the original purchase price of your house, or is appreciation also being considered?