Odysseas Papadimitriou is CEO of the credit card comparison website CardHub as well as the personal finance social network WalletHub.
We’re expecting big things from 2014. Not only has the Bureau of Labor Statistics been reporting consistent job growth, but Congress also seems to be playing nice in advance of the mid-term elections, auto sales are displaying year-over-year growth, and neither Fed tapering nor international crisis has proven enough to derail the stock market.
“I haven’t been this optimistic in years,” says Elliott Eisenberg, former senior economist for the National Association of Homebuilders and current president of the economic forecasting site graphsandlaughts.net. “Things are finally starting to happen. All the pieces are finally falling into place.”
There are a couple of new trends that you should note before diving headfirst into the housing market, though. The phoenix-like ascent of private mortgage insurance is one such trend.
Weigh Your Mortgage Insurance Options Carefully
Buyers who make a down payment of less than 20% of their new home’s value are legally required to purchase mortgage insurance. This protects lenders against losses in the case of default, thereby encouraging borrowing and spending to a broader segment of the population.
Many people satisfied this requirement during the downturn by taking out FHA-backed loans, as government guarantees were about the only thing that could encourage shell-shocked banks to issue loans, at least at a reasonable price. In fact, FHA loan volume surged some 330% from 2007 to 2009. But things have changed since then.
Under financial pressures of its own, the FHA has tightened underwriting standards and raised prices. FHA mortgage insurance premiums have nearly doubled as a result. Prospective buyers with less than 20% to put can now save $3,500 to $13,000 in just the first five years of their mortgage if they opt against an FHA-backed loan in favor of private mortgage insurance and a traditional home loan.
The extent of your savings will depend on the strength of your credit standing as well as the amount of your down payment – the bigger, the better in both instances. Even so, all PMI users can expect their savings to increase as time passes by.
Why? Well, the Federal Housing Administration last year introduced a new rule requiring FHA mortgage insurance premiums to be assessed throughout the life of a loan. PMI premiums, in contrast, are stopped once you pay off at 20% of your home. The average PMI user is therefore looking at savings upward of $20,000 relative to the average FHA borrower through the first 10 years of their mortgage.
Institution Size Matters, But Not Always
Mortgage insurance is likely to be increasingly important moving forward given the CFPB’s new Qualified Mortgage (QM) guidelines. Banks basically have to consider eight types of information that collectively speak to our “ability to pay” for what we borrow. For example, one of the provisions states that a borrower’s debt-to-income ratio must be below 43%. Interestingly enough, the rules would have included a 20% down payment requirement if not for intense opposition from the lending industry.
Of course, comprehensive comparison shopping is the only way of truly ensuring that you get the best deal. But now that you have a pretty good sense of what to look for, that task will be much easier.