PMI is Private Mortgage Insurance. It’s required on any home loan made without at least 20% down payment. It protects the lender against the risk that you, the less-than-20%-down buyer, will default on your loan. Your monthly mortgage payment is higher, but that increase is way less painful than saving 20% which could take years and years for most of us.
Starting in March 2008, the nation’s 2 biggest PMI issuers are restricting who gets a PMI policy. Industry leader MGIC Investment Corp’s limit is a minimum of 5% cash down; it’s 3% for competitor PMI Group. The change applies in areas the companies consider “restricted markets”. These markets include the entire states of Arizona, Florida, and Nevada, as well as the metropolitan areas of Washington, D.C., Detroit, Chicago, Boston and Atlanta.
This change will hit first timer buyers hard, since they’re rarely rolling around in spare cash. Less than 3% to 5% cash down = no PMI policy = no home loan = no new home smell in your future. What’s a cash-strapped buyer to do?
- Hurry. If you’re buying to live in it and plan to stay 5+ years, don’t worry about whether home prices will fall a little bit more in the rest of 2008 and 2009. There are 55,000 Valley homes to choose from, Sellers are being exceptionally accommodating, and interest rates remain relatively low. It’s a buyer’s market like we haven’t seen in decades. Bold buyers can make a killing, long-term.
- Hope that your lender can get you a PMI policy from somebody other than the 2 big boys in the game, MGIC & PMI Group.
- Use a Down Payment Assistance program like AmeriDream and Nehemiah Corp. But note that these have time limits too. They won’t be around forever.
- Calculate how long it would take you to save 20% on your expected home purchase. Then evaluate whether buying now and risking a little price deflation in 2008/09 is better or worse than waiting X years till you have 20% down saved. For most buyers, buying sooner makes more sense than waiting & saving.
- As long as you’re calculating your savings rate in #4 above, be realistic. On paper I can save tens of thousands per year. In reality, my savings account needs a few human growth hormone injections to beef it up. There’s always a movie to see, a new gadget to buy, or a round of drinks to spring for. Most of us don’t save as much as we think.
- Don’t forget that regular mortgage interest is tax deductible, and so are PMI payments. You’ll have a fat deduction on your federal income tax statement that might offset some of the temporary pain of budgeting to pay a mortgage every month.
New PMI policies are just another brick in the wall of reasons to buy an Arizona home now if you've been fence sitting for a while.