A new survey from TD Bank revealed that a large percentage of recent home buyers needed mortgage insurance to get the deal done.
The bank surveyed 2,000 Americans who purchased a home over the past 10 years and found that 37% financed their homes with the help of mortgage insurance.
If we consider just the past two years, the number was even greater, with 43% relying on MI to close their loan.
In other words, nearly half of recent borrowers are unable or unwilling to put down 20% when purchasing a home, which makes the cost of homeownership a lot costlier.
Are Home Prices Too High?
It’s kind of a testament to how expensive homes are these days, despite mortgage rates and corresponding monthly mortgage payments being somewhat affordable to many.
While the Fed has been able to drive down interest rates via efforts such as QE3, they haven’t been able to make the issue of large down payments magically disappear.
Yes, there are options for those with little cash set aside, such as FHA loans, which only require a 3.5% down payment, and conventional loans, which only require five percent down.
There is even 100% financing still floating around, thanks to the Rural Housing Service’s popular USDA loan.
But the down payment continues to be an issue for most Americans looking to buy a home, mainly because we have a tough time saving money. No wonder the typical renter needs an FHA loan in order to buy a house.
Unfortunately, we can’t turn back now because things have only really gotten better thanks to recovering home prices that are reaching new all-time highs in many areas nationwide.
This has allowed millions of homeowners to get their heads above water again, which is great.
However, it has also burdened future would-be home buyers, who must now contend with even higher home prices, and not necessarily any more income to come to the table with. Nor any more savings.
TD Bank Is Pitching Their No-MI Loan
Now it should be noted that TD Bank is making both an argument against FHA loans because most require mortgage insurance for the life of the loan now (and it’s expensive), and PMI, simply because it’s another monthly cost to worry about.
And they’re doing it because they recently launched their Right Step mortgage program, which only requires a 3% down payment without MI.
It’s a big deal because Fannie Mae just reduced their max loan-to-value to 95% from 97%. So they’re really one of the few places where you can get a low down payment loan these days without paying mortgage insurance.
But what some people may not understand is that just because there’s no MI doesn’t mean you’re not paying for it. It’s just built into the interest rate. So instead of getting a 4% rate on your 30-year fixed, you might be stuck with a rate of 4.5% or higher. Same goes for lender-paid MI.
That’s the tradeoff. And the problem with taking a higher interest rate on your loan is that it stays with you until you sell, refinance, or pay off the loan.
On the other hand, PMI can be removed once your LTV reaches 80%, which can happen sooner rather than later if home prices keep rising, or if you pay your mortgage down early.
So whether you “need” MI or not, you’re still paying for it whenever you come in with less than 20% down. You just may not realize it.
(photo: Dan Moyle)