While adding mortgage insurance to a loan may cost more in the short run, some options for avoiding it may end up being more expensive over the life of the loan
Part II: I am new to the industry and my mentor has indicated that my clients should never pay mortgage insurance if they can avoid it. When his clients have less than 20% to put down, he always has his clients use a second to avoid mortgage insurance. Is this good advice or is there another perspective in this regard?
--Brittany from California
Last week we spoke of acting as a trusted advisor by presenting all options to your clients. We presented mortgage insurance (MI) as a tool which supports homeownership by limiting the cash needed to purchase. However, something about that tool needs further explanation. When loan officers compare the payments using MI to payments using a second mortgage, many times the factor of MI cancellation is left out. For example, perhaps the choice is between a second mortgage and MI. And perhaps the client obtains the home below market value, is going to renovate the home, and/or is going to be paying down principal rapidly. In these situations, did you know that MI could be cancelled in as little as two to five years, while the client could be paying on the second for a considerably longer time?
In addition, the second may be subject to payment changes in the future, if the loan has an adjustable rate. Even convenience can be a factor, as many homeowners would prefer making one payment each month. Thus, while one alternative may have a higher payment in the short-run, choosing the wrong option may cost the client thousands in the long-run. The responsibility of presenting all options also extends to choosing between MI options as well. We will cover more on this choice next week.
--Dave Hershman
Dave Hershman has been the leading author and a top speaker for the industry for decades with six books authored and hundreds of articles published. His website is www.originationpro.com. If you have a reaction to this commentary or another question you would like answered in this column? Email Dave directly at [email protected].
