Could Changes in PMI Mean Higher Mortgage Costs?
The Federal Housing Administration (FHA) has recently proposed some changes to private mortgage insurance (PMI) requirements in the United States. If these proposed changes go into effect, they could have a big impact on prospective home buyers and their real estate agents alike. Specifically, it's predicted that buyers could see significantly higher mortgage costs. The Proposed Change Currently, home buyers are required to purchase PMI when they place less than a 20% down payment on a home. Nothing is changing when it comes to these rules. However, the rates associated with private mortgage insurance could be. Specifically, insurance rates could raise anywhere from 0.1 to 0.15 percent. It may not seem like a significant increase, but it can certainly add up over time. The rationale behind this proposed change in PMI rates is that home buyers of today are a greater risk to insurance companies than they have been in the past. Foreclosure rates have been on the rise over the past decade, making it more expensive for companies to insure those who take out FHA loans. After all, a mortgage insurance policy exists to protect the mortgage lender in the event that the home buyer misses or stops making a payment on the loan. Impact on Home Buyers and Real Estate Agents It's predicted that home buyers with lower credit scores will experience the largest increase in PMI rates. After all, those with poor credit are seen as the highest-risk home buyers when it comes to missed payments and foreclosure. Homeowners with average or above-average, on the other hand, should not experience as much of an increase. Just what constitutes a high, average, or low credit score? Generally, those with credit scores over 700 are considered to be 'high" or "above-average," whereas 650 to 700 is considered to be the norm. Those with credit scores until 650 will likely see the biggest increases in their PMI costs and thus their overall monthly mortgage costs. After all, PMI is typically built into one's total monthly mortgage payment. Real estate agents will, in turn, suffer from higher PMI rates as well. With higher rates, fewer people will be able to afford to become homeowners, so real estate agents will have less business. On the bright side, the clients they deal with will be more likely to be those with higher credit scores and thus greater financial reliability. Advice for Future Home Buyers Anybody considering the option to become a homeowner in the near future should be aware of this proposed change and the effect it could have on them. Keeping track of proposed changes and staying updated on the matter will prove helpful when it comes to buying a home. Furthermore, taking the time to factor PMI into the cost of homeownership is also important. These days, too many homeowners fail to factor this cost into their budgets. In reality, PMI usually adds $100 or more to a monthly mortgage--an amount that's more than a small chunk of change to many. Finally, those who wish to avoid this additional cost (and those who have the means) may want to consider making a down payment of 20% or more. It is also an excellent way to build equity in a home sooner rather than later, making it a win-win situation.