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  • MGIC Cuts Mortgage Insurance Like Many Other MI Providers

MGIC Cuts Mortgage Insurance Like Many Other MI Providers

  • April 11, 2018

Like many other mortgage insurance providers recently, Mortgage Guaranty Insurance Corp. (MGIC) announced it has also chosen to cut its mortgage insurance premiums. MGIC explained the move was made to reflect the changes to the corporate tax rate earlier this year.   The reduction, set to go into effect June 4th, 2018, will likely make conventional loans more competitive than FHA loans, in many circumstances. 

Since the Recession, FHA loans have become the standard for first-time home buyers.  However, since then a few things have changed to level the playing field between conventional financing and FHA loan options.  Fannie Mae and Freddie Mac now offer first-time homeownership programs that allow for 3% down payments, compared to the FHA’s 3.5% down payment.  

FHA has also increased both their upfront and annual mortgage insurance premiums (MIP) and requires this MIP throughout the life of the loan, in all cases when the down payment is less than 20%.  When using conventional financing, home buyers have the option to pay an upfront lump sum or a monthly fee that falls off when the loan reaches the 78% amortization point, but with the FHA the buyer will have to pay for both and, in many cases, for life. The FHA does have the advantage of usually having a slightly lower interest rate, which can in many cases justify paying the higher mortgage insurance.  It is important to consult a professional before shopping for a home to see what option is best for you.

We compared a few common credit scenarios to determine the difference between FHA and low-down payment conventional mortgage financing using the current FHA and MGIC premiums compared to the new MGIC premium (available June 4th).

 

Monthly Mortgage Insurance Comparisons:

97% LTV w/ 690 FICO

FHA-Insured Loan

Conventional Loan with PMI (Current Premium)

Conventional Loan with PMI (Reduced Premium)

House Price

257,732

257,732

257,732

Down Payment*

3%

3%

3%

Monthly Principal, Interest, & Mortgage Insurance

1,413

1,559

1,511

One-Time Interest

4,375

0

0

Total Cost (4 years) Conventional Wins!

12,590

14,016

11,712

Total Cost (7 years) FHA Wins!

18,329

24,528

20,496

Total Cost (10 years) FHA Wins!

23,649

35,040

29,280

Total Cost (Overall) Conventional Wins!

43,107

37,668

31,476 


 

95% LTV w/ 690 FICO

FHA-Insured Loan

Conventional Loan with PMI (Current Premium)

Conventional Loan with PMI (Reduced Premium)

House Price

263,158

263,158

263,158

Down Payment

5%

5%

5%

Monthly Mortgage Insurance (1st year only for FHA)

176

225

196

One-Time Interest

4,375

0

0

Total Cost (4 years) Conventional Wins!

12,107

10,800

9,408

Total Cost (7 years) Conventional Wins!

17,508

18,900

16,464

Total Cost (10 years) FHA Wins!

22,515

27,000

23,520

Total Cost (Overall) Conventional Wins!

40,829

29,025

25,284


Based on the scenarios above, for a borrower with a 690 FICO score and a 3% down payment, conventional financing is the better option when they stay in the home for 4 years or for the duration of the loan, but the FHA loan is the better option if they stay in the home for 7 years or 10 years. A borrower with a 690 FICO score and a 5% down payment will save more on the cost of mortgage insurance by financing with a conventional loan compared with an FHA loan in three out of four scenarios, if they stay in the home for 4 years, 7 years, or for the duration of the loan.  However, the FHA loan becomes the better option if they stay in the home for 10 years.

 

97% LTV w/ 710 FICO

FHA-Insured Loan

Conventional Loan with PMI (Current Premium)

Conventional Loan with PMI (Reduced Premium)

House Price

257,732

257,732

257,732

Down Payment

3%

3%

3%

Monthly Mortgage Insurance

165

0

0

Monthly Principal, Interest, & Mortgage Insurance

1,413

1,267

1,267

One-Time Interest

4,375

9,775

7,950

Total Cost (4 years) Conventional Wins!

12,590

9,775

7,950

Total Cost (7 years) Conventional Wins!

18,329

9,775

7,950

Total Cost (10 years) Conventional Wins!

23,649

9,775

7,950

Total Cost (Overall) Conventional Wins!

43,107

9,775

7,950


 

95% LTV w/ 710 FICO

FHA-Insured Loan

Conventional Loan with PMI (Current Premium)

Conventional Loan with PMI (Reduced Premium)

House Price

263,158

263,158

263,158

Down Payment

5%

5%

5%

Monthly Principal, Interest, & Mortgage Insurance

1,424

1,267

1,267

One-Time Interest

4,375

8,300

5,400

Total Cost (4 years) Conventional Wins!

12,107

8,300

5,400

Total Cost (7 years) Conventional Wins!

17,508

8,300

5,400

Total Cost (10 years) Conventional Wins!

22,515

8,300

5,400

Total Cost (Overall) Conventional Wins!

40,829

8,300

5,400


However, with a slightly higher FICO score of 710, the borrower will save more on the cost of mortgage insurance with conventional financing in every scenario, with both a 5% down payment or a 3% down payment if the borrower is willing to pay a lump sum amount that in many cases is double what is required for the FHA.

 

Since the average homeowner usually stays in their home for 7 years, FHA still has an advantage when looking at the monthly options. Based on mortgage insurance providers like MGIC’s cuts to mortgage insurance premiums, consumers should consider both options and consult a loan officer to determine what works best for their specific situation. 

  

Disclaimer: Terms of Repayment for Examples Scenarios Above.

*FHA scenarios based on $250,000 loan and 4.375% interest rate. Conventional scenarios based off of $250,000 loan and 4.5% interest rate. Payment example: If you choose a $250,000 loan at a rate of 4.375% (4.570% APR), with a loan-to-value (LTV) of 97%. You would make 360 monthly payments of $1,248.21. Payment stated does not include taxes and insurance, which will result in a higher payment.

If you choose a $250,000 loan at a rate of 4.500% (4.697% APR), with a loan-to-value (LTV) of 97%, you would make 360 monthly payments of $1,266.71. Payment stated does not include taxes and insurance, which will result in a higher payment.

 

Doug Luza
Branch Manager
NMLS # 311377
Branch NMLS # 1198991


Doug Luza

PHONE: (832) 575-2210
dluza@cmgfi.com

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