Mortgage insurance

[Capt Worley PE]

I would say this mess was not caused by people who took 90% to 100% LTV loans, but by people who took loans they could not afford.

I think if you can't save up for a down payment of decent size, you probably can't afford the house.

 

[udpolo15]

I think if you can't save up for a down payment of decent size, you probably can't afford the house.

True to some extent, but there are definitely areas were due to the price of housing, it is difficult to save enough money to cover a down payment, especially for 1st time buyers.

I would agree with you for 100% loans from a financial discipline perspective, but I wouldn't blame someone for only putting 10% (or maybe even 5% down) in some markets. Also, my views only apply to owner occupied homes. Any speculators and/or flippers should have been required to put more than 20% down.

 

[What!!]

I can afford the 20% down but that will wipe out my emergency cash reserve. I was thinking of building up my emergency cash reserve (about 6months of expenses including mortgage payment) and then pay up the 20% so that i am not left in limbo in case i lose my job. The other way around would be to wait until i have enough money for 20% down and emergency reserve and then look for house. From what i have observed is that it takes at least 3-4 months to find a home you like. Thats why i wanted to start looking for houses now.

I will also talk to bank to see if there is still any alternative to avoid PMI.

 

[roadwreck]

I can afford the 20% down but that will wipe out my emergency cash reserve

Then you don't have enough money to buy the house.

 

[Capt Worley PE]

^Second.

 

[IlPadrino]

I think those that say "if you don't have $x, then you can't AFFORD the house" are being too simplistic. If you're financially stable and the cost of the mortgage is about the cost of rent, you can probably AFFORD the house. The mortgage crisis was exacerbated by 100% LTV ratios, but I think they were caused by speculators (even if they didn't recognize they were speculating) who assumed home values would go up sufficiently to make required refinancing (because the interest rate on the variable loan was going to go WAY up) easy.

If you're getting a 30yr loan with a fixed interest rate, I really don't see the problem with high LTV ratios (even 100%, but those seem hard to come by these days!) if you're willing to stay for the long run.

It always seems a shame that when you can finally AFFORD a large house in a nice neighborhood, the kids aren't living at home any more, and there's really no need.

 

[Supe]

I'm with IlPadrino on this one. Quite a few of the people I graduated with who were not going to be traveling for their respective jobs had bought homes with a minimal down payment. The key being that these were reasonably priced homes that met their needs. For a few of them, the mortgage was actually cheaper than the rent in the area. They have no problem meeting the monthly payment and then some, they simply hadn't had the time to sit and accumulate the money for the down payment. These are all single guys, no kids/family to be concerned with, so to say if you don't have $x you can't afford the house is greatly oversimplifying things.

 

[Capt Worley PE]

I guess I don't see the logic behind moving somewhere, sitting and paying rent until you can save up $x for a down payment, and then going and buying the home when you could have been paying it off all along.

Because if you are frugal enough to save the 20% down payment while making rent payments about what your house payments will be, you know you will be able to pay for the house and set money aside for savings/repairs/etc. If you just buy the house without knowing your real world spending habits, you are likely to get yourself into trouble.

Homeownership shouldn't be just jumped into. I lived in an apartment for nine years or so before I bought house. of course the first five years I moved every year, so really I was stable for about four years, which enabled me to save up a down payment.

Different strokes for different folks, I guess.

 

[IlPadrino]

Because if you are frugal enough to save the 20% down payment while making rent payments about what your house payments will be, you know you will be able to pay for the house and set money aside for savings/repairs/etc. If you just buy the house without knowing your real world spending habits, you are likely to get yourself into trouble.

How long would it take the average person to save over $100,000? It can be very hard (beyond frugal!) to save 20% in areas having moderate houses going for more than $500,000.

I'd think everyone agrees you have to look at the total cost of ownership on a house and figure in repair expenses in addition to PITI - and then balance against your other spending and income.

 

[Road Guy]

when we refinanced recently the mortgage companies were very very strict about PMI, we were getting a 15 year loan and we barely hit the 80 / 20 rule to avoid PMI .,Actually I had to send in an overpayment to my existing loan for a few thousand to kick me over the 20% mark, we were that close and they still wouldnt budge away from it

I remember that a few years ago 15 year loans didnt have PMI...

But the mortgage companies we talked to even said that they were discouraging getting the second loan to put down the 20% so you wouldnt have PMI (I dont know if thats the rule now or if its just something they told us)

but it did seem that now more than ever they mortgage companies want their PMI.....

 

[MA_PE]

How long would it take the average person to save over $100,000? It can be very hard (beyond frugal!) to save 20% in areas having moderate houses going for more than $500,000.
I'd think everyone agrees you have to look at the total cost of ownership on a house and figure in repair expenses in addition to PITI - and then balance against your other spending and income.

I live in the Boston area and entry level houses are ~$300-350. It used to follow that one would buy an entry level house (with a reasonable down payment), build up some equity and then roll the equity (with the original down payment) as a down payment on something better.

To just dive into the "moderate" level might be overly optimistic. Also I agree with the difficulty raising the down payment in some areas but you can't blame the lender for mandating PMI if the down payment is not sufficient.

Lastly, I think we're in agreement that the concept of - small/no down payment = can't afford the house is overly simplistic.

 

[IlPadrino]

Also I agree with the difficulty raising the down payment in some areas but you can't blame the lender for mandating PMI if the down payment is not sufficient.

Which brings us back to the original question about PMI. And, I wonder, is the "collusion" to avoid PMI really part of the mortgage meltdown? If I understand right, with a first and second load, the 80% mortgage is well protected (after all, they get their money first in a foreclosure, so it's as if there's been 20% put down) and the 20% charges a higher interest rate (which should account for their increased risk of default with no PMI)? I read something a while ago that part of the problem with the crisis was having all these "unqualified" people enter into the market which inflated the prices of homes artificially (those unqualified home owners were also buying in the high end). Maybe requiring them to pay PMI would have kept them out of the market?

Anyway, I still think PMI is a scam... but it does make sense that those putting 20% down should pay less for their mortgage because there's less risk (similar probability maybe, but much less severity). I say either give them a lower interest rate or make the others pay PMI - it's certainly fair. BUT... those with good credit should not pay the same for PMI as those with poor credit.

 

[Chucktown PE]

PMI is not a scam. The lender is simply buying an insurance policy in case you default such that they can recover their losses. Their risk is huge if you default. On a $300,000 house this could mean a $60,000 hit for them. So the $200 or $300 a month is simply covering that loss in case it happens.

IlPadrino, I think people are being overly simplistic by saying you can't afford the house. I would guess an entry level house in DC is probably in the $300k range and saving up $60k on an $80 engineer's salary could end up taking a long, long time. Possibly long enough that the houses are more expensive by then. At least when you're paying a mortgage you're building equity in something.

Like I posted above, I'm still renting because I think the market has a lot farther to fall. But if I had waited for the 20% down while I was in ATL I would still be trying to save. If you're not getting some exotic mortgage and you're comfortable with the payment you can judge whether it's a good move for you.

 

[IlPadrino]

PMI is not a scam. The lender is simply buying an insurance policy in case you default such that they can recover their losses. Their risk is huge if you default. On a $300,000 house this could mean a $60,000 hit for them. So the $200 or $300 a month is simply covering that loss in case it happens.

My confusion is that PMI or 80/20 loans haven't allowed many lenders to recover their losses. And I believe insurance should be only about catastrophic loss (like health and home insurance). Lenders should be able to pay out there losses with sufficient interest rates on the loans. Increase the rates a percent and cut out the middle man (PMI).

 

[Chucktown PE]

My confusion is that PMI or 80/20 loans haven't allowed many lenders to recover their losses. And I believe insurance should be only about catastrophic loss (like health and home insurance). Lenders should be able to pay out there losses with sufficient interest rates on the loans. Increase the rates a percent and cut out the middle man (PMI).

In some markets you can do this. You can get a 90/10 loan, however the interest rate is much higher. But it takes time for that higher interest rate to build up enough to cover losses. PMI has allowed some lenders to cover their losses, but one of the big suppliers of this insurance was AIG, and look what happened to them.

The bottom line is that we are going through a process of deleveraging. It is going to be painful, and everyone is going to have to pay more as a consequence.

 

[MA_PE]

PMI is also buying the risk that fluctuations in housing prices will stay below 20% of the purchase price for the life of the primary loan, which "stable" lenders with fixed rates are not willing to do.

 

[squishles10]

we just got 100% financing on our house, nothing down, no pmi, no second loans, etc. we could have put the 20% down but since they didnt require it we felt we'd rather keep it in the bank just in case. we can always put it in later.

 

[MA_PE]

we just got 100% financing on our house, nothing down, no pmi, no second loans, etc. we could have put the 20% down but since they didnt require it we felt we'd rather keep it in the bank just in case. we can always put it in later.

They let you borrow 100% appraised value? Interesting.

Good luck with the new house.

 

[squishles10]

They let you borrow 100% appraised value? Interesting.
Good luck with the new house.

Yeah- it's a physicians loan through BoA. I doubt it's going to be around much longer, though who knows.

Thanks- we just ripped a bathroom wall apart and spent $3k on the AC. Oh and accidentally painted the dining room lavender. Sweet. It's an adventure

 

[MA_PE]

accidentally painted the dining room lavender

I'll bet the swatch looked beautiful. It's when it gets extrapolated over the whole room that it gets overwhelming. Two words "Atrium White". I painted virtually the whole house this color. Want a different look? change the drapes.