FIRST-TIME homebuyers -- and everyone else short of down-payment cash -- have some important good news coming next month. That's when a series of new, consumer-friendly cost-reduction options for private mortgage insurance kick in nationwide for the first time. The changes should help large numbers of marginal purchasers to buy a house, and allow others to buy more costly houses than they thought they could afford.
Private mortgage insurance is virtually mandatory whenever you put down less than 10 percent. The insurance policy can cost you thousands of dollars over the life of the loan, but serves solely to protect your lender from loss in the event you default on payments or go to foreclosure.
Adding anywhere from $30 to $100 to borrowers' monthly expense burdens, mortgage insurance is one of the least popular features of the home-buying process. But beginning next month, new mortgage applicants can look forward to keeping at least some of those dollars in their own pockets.
On March 1, lenders who deal with the largest home-loan insurer, Mortgage Guaranty Insurance Corp. (MGIC), will be able to offer two new options for people seeking mortgages with 5 percent to 10 percent down payments.
Both options cut the mandatory insurance coverage level on the loan, and guarantee decreases in homebuyers' insurance payments compared to what they'd have to pay today.
In one plan, t he insurer will let borrowers roll part of the insurance cost into the loan amount, and then pay monthly premiums that are well below current rates.
For example, a borrower who can put down only $5,000 on a $100,000 loan at 7 percent currently is required to pay $65 a month for mortgage insurance. Using the first new option from MGIC, the same borrower would roll a $750 upfront fee into the original loan amount, and pay $40.30 a month in insurance premiums.
The second plan would lower monthly premiums even further -- $28.33 a month instead of $65 for the same $100,000 5-percent-down borrower.
But this time the fee would be slightly larger and rolled into the interest rate on the mortgage note, rather than into the principal amount of the loan. The rate would be one-quarter of a percent higher, but as interest, the fee would be tax-deductible.
MGIC is the first insurer to introduce these changes, but most competitors in the mortgage insurance industry are likely to follow suit -- perhaps with additional options -- by early March. MGIC, in turn, was prompted to rejigger its programs by the giant of the American home investment field, Fannie Mae.
Beginning in the second week of March, Fannie Mae, which buys billions of dollars' worth of mortgages annually from local lenders, will lower its insurance coverage requirements for mortgages carrying 5 percent to 10 percent down payments that are originated through its automated underwriting system, known in the trade as Desktop Underwriter.
Thanks to technological advances that enable the corporation to better evaluate and deal with borrower risk, Fannie Mae believes mortgage insurance coverage levels and costs on low-down-payment loans are too high.
Since Fannie Mae is the beneficiary of the insurance on the loans it purchases, by lowering its required coverage levels, it automatically cuts consumers' out-of-pocket costs.
And Fannie Mae is not the only big player heading in this borrower-friendly direction. Fannie Mae's rival in the mortgage investment business, Freddie Mac, revealed last year that it, too, believes private mortgage insurance rates are higher than necessary. Freddie Mac said it would like to experiment with a variety of methods of cutting insurance costs to the homebuyer -- possibly producing even deeper cuts than those contemplated by either MGIC's or Fannie Mae's plans.
Under its current congressional charter, however, Freddie Mac may not have the statutory authority to experiment with the sort of cuts it wants, and plans to ask Congress to lessen those restrictions. Like Fannie Mae, Freddie Mac believes that its automated underwriting, credit analysis, property valuation and loss-control technologies have cut the risks it faces in handling mortgages with low down payments.
All this adds up to excellent new home-buying opportunities for young, first-time purchasers who haven't accumulated much money for a down payment, and can't handle high monthly loan charges.
With one of the new mortgage insurance plans, you'll have a better shot at becoming a homeowner, or purchasing a bigger home. Be sure to ask your lender or broker for one of the new "lower-coverage" plans -- they won't be available everywhere -- and then talk about their pros and cons for your specific situation.
Kenneth R. Harney is a syndicated columnist. Send letters care of the Washington Post Writers Group, 1150 15th St. N.W., Washington, D.C. 20071.
Pub Date: 2/07/99