Low Rates and the Return of Private Mortgage Insurance (PMI)

Its happening again.  Rates are tumbling and tumbling more.  I read recently that avoiding closing costs in a declining rate environment is a wise approach and I completely agree.  By avoiding closing costs two things happen:

1. The net benefit of the improved cash flow is immediately realized, and

2. You are in a position to refinance AGAIN as rates continue to slide.  Because you haven’t paid any of your equity there is not much downside.

I’ve been making loans since 2003, and rates have pretty much always been really attractive with a few exceptions (sorry purchasers of the summer of 2006!  I hope you’ve refinanced out of your 6.625% fixed).

Something else is brewing that I think bodes well for our real estate marketplace: the return of Private Mortgage insurance, aka PMI.  PMI has been on the sidelines in recent years.  This isn’t surprising because when homes default, the banks cash in their PMI policies.  You see — PMI is to protect the BANKS not the borrowers.  PMI is good for borrowers and home owners because it ALLOWS lenders to lend and borrowers to buy, which is obviously critical.

Since 2007, mortgage insurance has been deductible for families with annual incomes less than $105k (DEFINITELY consult a CPA to confirm this — I’m just some jerk mortgage blogger), so there are a lot of reasons why I am very happy that mortgage insurance exists.  Anyway — as property values declined in recent years, MI companies were requiring more equity and charging higher premiums.  That is all reversing now!

This is particularly good in light of the recent increases in FHA mortgage insurance (which is now 1.15% of loan amount annually for ALL FHA’s).  It appears that the PMI companies are jumping back into the market place to provide lower cost options for borrowers.  So even if you only have 5% down — a conforming loan with PMI will likely be a better loan for you than the FHA — but ONLY IF your credit score is high.

Thank god for the FHA loan too — It will ALWAYS be a great loan to consider for a variety of reasons… But now there are some very compelling alternatives that borrowers should be looking at.

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