According to a recent article in Real Estate Economy Watch, “Despite 19.1 percent fewer home sales in September than a year ago, private mortgage insurance applications received by leading mortgage insurers are up 32 percent in the past 12 months.”
For those who might not know, private mortgage insurance (PMI) protects the lender in the event the borrower defaults and it comes into play when the borrower is unable to make a conventional (20% of purchase price) down payment. Using PMI the borrower can borrow with as little as 5 % down. The smaller down payment makes the loan higher risk.
So a somewhat simplified analysis suggests that while the number of home sales is down 19%, more and more of those purchasers need private mortgage insurance (32% more) because they simply do not have the traditional down payment. The good news is PMI makes home purchasing possible for buyers who’ve been unable to accumulate the sizeable amounts of cash typically necessary to purchase a home. The bad news is PMI significantly increases the monthly cost of the home. (A homeowner with a $100,000 mortgage could see an additional $40 tacked on to his or her mortgage payment.)
So what makes sense? Does a buyer who does not have an abundance of cash buy now and pay the PMI? Or does it make sense to wait? The only correct answer is, “It depends.”
Now more than ever we all need to manage our money wisely. You don’t have to see too many real estate ads to hear “it’s a good time to buy.” I’d suggest inserting some disclaimers. It might be a good time to buy. Prices are down and interest rates are at historic lows.
But if it’s a great time to buy, why isn’t everyone buying? Why were sales down 19% in September? Here’s one correct answer that’s certain: Now more than ever it makes sense to sit down and look hard at your personal situation before making a major financial decision. It might also make sense to do that with someone who has a long term outlook and no immediate self-interest in your decision. I have several clients who’ve told me that I’m not allowed to retire for at least three years.
That’s called “taking a long term outlook.”