While headlines remind us daily of the nation's economicdifficulties and the steady rise in mortgage delinquencies and homeforeclosures, a more positive message deserves more attention. It'sa good time for first-time buyers and other low down paymentborrowers to buy a home. And credit unions can help them make asmart mortgage choice.
The National Association of Realtors reports that existing-homesales, through July, were up four months in a row for the firsttime in five years, with price declines increasing affordability inmost metro areas. The combination of low interest rates andimproved affordability suggests that increased sales may well besustainable. Providing additional incentive to first-time buyers isa tax credit of up to $8,000 for those who close on their homes bythe end of November.
To take advantage of this changing environment, homebuyers aretaking a new look at the mortgage options available to them.They've read about the consequences of choosing the wrong loan, andnow, more than ever, they want safe, secure mortgages that areaffordable and sustainable over time. That's especially true forfirst-time buyers, many of whom are making low down payments.
Today, those buyers and others unable to make a 20% down paymentessentially have two options from which to choose: loans insured bythe Federal Housing Administration and loans insured by privatemortgage insurers. Premiums for each are tax deductible, and bothprograms are safer than the combo, or “piggyback,” loans no longerin favor. Each, however, has its own individual characteristics.It's important for mortgage lenders to help their customersdetermine which is right for them.
Loans through the FHA may seem more alluring to some buyers sincethe monthly payment rates can be attractive and the down paymentrequirements are often more lax. However, a careful comparison canreveal that loans with private mortgage insurance are better fitfor many low down payment borrowers.
Consumers need choices. With PMI, qualified borrowers can choosefrom a variety of available loans, as opposed to a single FHA loanoption. PMI may be cancelled and insurance payments cease once thehomeowner builds 20% equity either through payments or homeappreciation. With an FHA mortgage, part of the insurance cost isrolled into the mortgage and remains in place even after theinsurance is cancelled. In addition, PMI-backed mortgages don'thave an added layer of government bureaucracy, making them arefaster and more flexible than FHA loans.
While it's true that FHA loans can require a lower down paymentthan those with PMI, additional consumer-friendly features makeloans with PMI especially attractive in the current environment.Since job loss is a major cause of foreclosure, the prospect ofunemployment rates rising above 10% has potential buyers worriedabout the possibility of losing both their jobs and their homes.The job-loss protection benefit offered by mortgage insurers allowsthose buyers to walk away from the closing table with the addedpeace of mind that comes from having a financial cushion in casethey lose their jobs.
With the Genworth and other programs available through creditunions, their mortgage payment (principal, interest, taxes andinsurance) is covered for up to $2,000 a month for up to sixmonths. Benefits are paid directly to the mortgage company just asif the borrower had made the payment.
Yet despite such programs, more than 3 million home foreclosuresare expected by the end of the year, with an additional 2.5 millionin 2010. Mortgage insurers are responding with proactive efforts tokeep people in the homes during these times of financialadversity.
It's important that lenders help today's buyers learn from theexcesses of the past and carefully consider their mortgage optionsbefore choosing which is right for them. If the market is torecover, it will be important for consumers and lenders alike tounderstand the need for mortgage loans that are both affordable andsustainable by the borrowers. Getting into a home sooner is onlybetter if it is also safer and smarter. Consumers need to able tobuy homes with confidence that they will be able to stay in themover the long term. While there are still difficult days ahead, themortgage landscape is changing. The safe, secure mortgage choicesnow available to consumers suggest there's every reason to believethe changes will be for the better.