- The Washington Times - Wednesday, June 11, 2003

A couple of weeks ago, I took a stab at explaining to a borrower why he was paying more than $900 per month for private mortgage insurance (PMI). I suggested that loan officers might weigh in with a few letters, and that, indeed, has happened.

In a general sense — with the emphasis on general, meaning for most people who have taken care to watch over their credit and pay bills on time — PMI will run about $40 to $50 per $100,000 borrowed. I soon found out with number crunchers, using general numbers is a no-no, at least in theory.

Brenda McDonald of American Harbor Mortgage Co. in Wilmington, N.C., stated that “$40 to $50 per $100,000 is not an accurate way to estimate mortgage insurance. There are far too many variables to use as simple a formula as that.” That’s a statement I appreciate, but I find that many lenders use that $40 to $50 figure quite freely, so I quoted it.

As with any industry, there are “usual” circumstances and “unusual” circumstances. What we find out from this PMI scenario is that the $40 to $50 figure is reserved for the borrowers who most likely have credit scores above 620 — the benchmark score in the industry reserved for premium rates and terms.

Kurt Jackson of Allied Home Mortgage Corp. in Liberty, Mo., seemed to give a good definition of why our subject borrower was paying nearly $10,000 per year in PMI.

“What they are explaining sounds like a Fannie Mae Expanded Approval Level III, [in] which PMI can be 4 percent or more of the principal balance a year. [This is] Fannie’s run into subprime lending. They probably would have been better off with a subprime loan at a higher interest rate so they could at least get the tax deduction or to wait 12 to 24 months and get their credit cleaned up.

“The combination of principal/interest and PMI equates to what would have been a 12.15 percent interest rate. With the astronomical PMI amounts on these loans, I don’t personally put any of my clients into them,” he said.

Richard C. Insley, president of APR Systems Inc., in Richmond, provided a great Web site from one of the world’s largest providers of PMI:

“A quick check of a Web site of a PMI issuer (here, for example www.pmigroup.com/lenders/pmirates.html#pricing) would reveal the pricing system that can result in high premium costs for high-risk loans and borrowers.

“Surely you know that a 98 percent LTV [the loan-to-value ratio for our subject borrowers] means that the lender is taking virtually all the risk in this transaction. When borrowers admit that ‘our credit is not great,’ that really means ‘count on us not to pay our bills.’ It’s a wonder that a lender is interested in loans like this under any terms.”

The PMI Group site provides this “Simple Case Study” to determine PMI:

• Determine the loan-to-value (LTV) ratio. For example, assuming the property’s selling price is $100,000 and the borrower makes a $5,000 down payment (5 percent), then the LTV is 95 percent.

• Determine the MI (mortgage insurance) rate. Mortgage insurance rates vary depending on coverage percentage, mortgage types and other variables. For this example, we will use the standard Fannie Mae/Federal Home Mortgage Corp. (Freddie Mac) coverage for a 30-year fixed-rate, 95 percent LTV mortgage.

The monthly PMI rate for this example is 0.78 percent. Visit a rate table for monthly rates, or check with your PMI representative for the most current rate information.

• Do the math. Simply multiply the loan amount ($95,000) by the MI rate (0.78 percent) and divide by 12 months in a year: $95,000 x 0.78 = 74100; $741 divided by 12 = $61.75 monthly premium.

The PMI monthly rate is where consumers may get their big surprise. The rate of 0.78 percent used in this example, for instance, reflects a borrower with a FICO score higher than 619. As our friends from our original example learned — if your credit has hit bottom, you’re going to pay more. They are paying a PMI rate of 4.19 percent, giving them a monthly PMI of $905 per month on a loan of $259,400.

So what have we learned, class? Obviously, if your score is low, credit is horrible and you still want to get a loan, you can get one. You’re going to pay dearly for it, however.

M. Anthony Carr has written about the real estate industry for more than 14 years. Reach him by e-mail (manthonycarr@erols.com).

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