May 24, 2018

The Cost of Not Using Mortgage Insurance

Issues Facing Originators

Housing analysts point to decreasing home affordability as a vital issue in 2018, with costs for buyers rising sharply due to an expected series of interest rate hikes over the course of the year.

Buyers purchasing the median-priced U.S. home as of the end of 2017 typically spent 15.7 percent of their income on a monthly mortgage payment, according to Zillow Research.

During the 1980s and 1990s, homeowners nationally typically spent 21 percent of the median income on mortgage payments – a level known as the historic norm. A Zillow Research report in March says local historic norms are now being exceeded in four California cities, plus Portland, Oregon; Denver, Colorado; and Miami, Florida.

Zillow Research economists say more cities will see affordability decline as mortgage rates and home prices climb:

  • If mortgage rates increase from their current level of about 4.75 percent to 5 percent in 2018 – as many forecasters predict – homes could become less affordable than the historic norm in 17 of the nation’s 35 largest cities.
  • In the event mortgage rates climb to 6 percent – the upper range of analysts’ expectations – homes in 20 of the largest 35 cities could become less affordable than the historic norm.

A 1 percent increase in interest rates typically increases a buyer’s monthly payment by 13 to 14 percent. The March Zillow report1 said mortgage rates would need to climb to close to 7 percent for monthly mortgage payments to exceed historic norms in most parts of the country.

A recent analysis by Trulia concludes affordability is currently higher than in the 1980s, when mortgage interest rates hit peaks of 16 percent or more,2 but Trulia’s economists also warn rate hikes will worsen affordability.

As Affordability and Rates Rise, Private Mortgage Insurance Offers a Solution

Against that backdrop, it’s likely some first-time buyers will abandon home searches as prices climb, but other potential buyers will try to move quickly to lock in the benefits of home ownership.

Over the past five years, many first-time buyers have experienced substantial home price appreciation.  On average, according to the National Association of REALTORS®, a median-priced single-family home increased in price by 39 percent from 2013 to 2018 – jumping $67,600 to $241,700.

Another benefit of buying rather than continuing to rent is that buyers with a conventional, fixed-rate loan can build equity with every monthly payment. Over time, this equity can be a vital asset, whether they sell the home and benefit from any gains through home price appreciation, or continue living in it after paying off the mortgage.

Renters don’t receive those economic benefits and also face the prospect of future rent increases. According to the U.S. Census Bureau, the cost of rental units climbed 21 percent, from $746 in December 2014 to $910 in December 2017.

For current renters, part of the attraction of buying a home is the knowledge the mortgage payment on a fixed-rate loan won’t increase during the entire life of the loan.

By financing their home purchase with mortgage insurance, eligible buyers can buy with only a modest down payment. In addition, homebuyers who choose MI may see their monthly payments decline when the MI premium portion of the loan is canceled, which can happen automatically once the mortgage balance is scheduled to drop to 78 percent of the property’s original value if the homeowner is current on payments.

With affordability expected to decline, current renters who wish to buy a home risk being priced out of the market by delaying action.

Under certain circumstances, MI premiums can be canceled even sooner at the homeowner’s written request when the principal balance of the loan is scheduled to fall to (or actually reaches, based on accelerated payments) 80 percent of the original value of the property. Requirements for borrower initiated cancellation include no junior liens on the property, a good payment history, and no decline in the property value.3 Also, investor guidelines may allow consideration of home price appreciation (instead of just original value) in the MI cancellation decision.4

With affordability expected to decline, current renters who wish to buy a home risk being priced out of the market by delaying action. In a period where it’s important for potential homebuyers with steady jobs and good credit to move quickly to purchase a house as inventories continue to tighten, MI can provide the flexibility needed to make the most of available opportunities with down payment options to fit a variety of needs.

1 “Rising Mortgage Rates Threaten Housing Affordability and Inventory,” Zillow Research, March 13, 2018.

2 “Not Your Father’s Housing Market,” Trulia, March 7, 2018.

3 See the Homeowners Protection Act of 1998 for more details.

4 Homeowners should discuss this potential option with their mortgage servicer.