Relative to the growth in home prices
over the last quarter century, Americans are earning less and, as a result,
saving less. This means young families today are having to wait longer than
their parents and grandparents before clearing that great barrier to
homeownership -- the down payment.
For these young families, low down
payment home mortgages -- loans with less than 20 percent down payments --
offer an opportunity to shorten that wait. As such, their popularity has
boomed. The government reports that in 1994 nearly one of every two homebuyers
obtained a low down payment loan; and many of them used private mortgage
insurance (MI) to realize their homeownership dream.
Still, confusion about the role of
private MI abounds. "What is it?" and "What does it do for
me?" are questions typically asked by consumers. Private MI enhances a
borrower's ability to attain a homeownership situation that is right for them.
Not only can private MI help put people in homes, but it can help put people
in homes in which they want to live.
Lenders require private MI on most
conventional mortgages because experience reveals a strong correlation between
borrower equity and default. The less money a borrower has invested in a home,
the greater the probability of default. Thus, private MI is a financial
guaranty that protects lenders against loss in the event that a borrower
defaults. Without that financial guaranty, lenders will typically require a
down payment of at least 20 percent.
A recent Chicago Title and Trust study
notes that first-time homebuyers in 1994 spent three years saving for a down
payment before buying. And when they finally did buy, the average down payment
was 13.7 percent. Had they gone without mortgage insurance and saved for the
requisite 20 percent down payment, these first-timers would have been renting
for a minimum of four-and-a-half more years. On the flipside, had they been
willing to put only five percent down, they could have realized their
homeownership dream in just over a year.
By waiting and going with mortgage
insurance, though, these first-timers increased their buying power. For
example, $5,000 is equal to a 10 percent down payment on a $50,000 home; but
it is also sufficient for a five percent down payment on a $100,000 home.
Another scenario: $10,000 may constitute a 20 percent down payment on a
$50,000 home; but it can also provide enough financial leverage to help
qualifying borrowers buy a $200,000 home with only five percent down.
This is the value of private mortgage
insurance -- it is the reason so many young families today can afford
homeownership despite earning and saving relatively less than their parents.
Unfortunately, some people continue to
confuse private mortgage insurance with mortgage life insurance. Private
mortgage insurance puts people in homes; mortgage life insurance pays all or a
portion of your mortgage in the event of your death.
Consumers who understand this
difference, understand how private MI enhances their ability to realize their
dream of homeownership.