Navigating Mortgage Insurance

I'm finding that more and more customers are opting for financed mortgage insurance on conventional loans. When a borrower has a very good credit score, there's only about a .25% addition to the interest-rate, even on a 95% loan, to forgo the monthly MI payment. So, for example, someone borrowing $200,000 on a 95% conventional loan would pay $1,013 for principal and interest at 4.5% and another $90 for mortgage insurance, for a total of $1,103 not counting taxes and homeowner's insurance. The same person could take a rate that is .25% higher and have a payment with no monthly MI payment. The principal and interest would increase to $1,043 per month, but with no mortgage insurance payment, the total is $60 less per month.

Obviously, the main advantage of financing the MI is a lower monthly payment. The other significant advantage is a little more interest to deduct from a tax perspective. The main disadvantage is that the borrower now has a permanent rate that is .25% higher than it would have been had they taken the lower rate and paid the monthly MI. Most mortgage insurance payments are only required to be made for two years and then only until the loan is paid down to 80% of the home's current value. So at some point the mortgage insurance can be dropped which would leave the borrower with a payment that is a little less long-term, taking the monthly mortgage insurance payment option.

The key is finding the break-even point of how long someone would need to stay in the home, paying on that loan, to determine which option works best. That is where we come in - to advise clients on how to structure this part of their loan so that they receive the most benefit. But it is important for you to understand that there are options.

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The Week Ahead
This week, Retail Sales will be released on Tuesday. Retail Sales account for about 70% of economic activity. The Producer Price Index (PPI) focuses on the increase in prices of "intermediate" goods used by companies to produce finished products and will come out on Wednesday. The Consumer Price Index (CPI), the most closely watched monthly inflation report, will come out on Thursday. CPI looks at the price change for finished goods which are sold to consumers. Housing Starts will be released on Friday. Industrial Production, Philly Fed, and Consumer Sentiment will round out the schedule.

The Week That Was
Last week was a light week for economic data, and investors mainly focused on the central banks of the US and Europe. Comments from Fed and ECB officials remained favorable for bonds, and mortgage rates moved down a little during the week, to the lowest levels of the year.

At the beginning of the year, the consensus outlook was for a moderate pace of economic growth in the US and for mortgage rates to slowly climb higher. Despite a weather-related slowdown over the winter, the growth outlook appears to be on target, yet mortgage rates have moved lower this year.

There are several factors which have contributed to the decline in mortgage rates this year. One reason is that inflation has remained low. The major indicators, such as the Consumer Price Index (CPI) and the PCE index, show that core inflation is well below the Fed's target level of 2.0%, and it is expected to remain low in coming months. Expectations for future inflation are a major factor in setting mortgage rates.

The conflict in Ukraine is also favorable for mortgage rates. During periods of uncertainty, investors typically shift to relatively safer assets, increasing the demand for mortgage-backed securities (MBS). Another influence has been the expectation that the European Central Bank (ECB) will begin a bond purchase program similar to the one used by the Fed over the last few years. The expected added demand for bonds from the ECB has pushed down rates around the world.