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% 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
While using a second to avoid the cost of mortgage insurance (MI) may be an option, you are right to think of providing another perspective to your clients. Remember that your goal as a mortgage advisor is to present all viable options to your clients and let them make a decision because it is their loan. If you don't present an alternative, then you are not giving the most complete advice possible. There are many factors which might determine the best option, and these variables include the details of the transaction, affordability, borrower preferences and more.
For example, perhaps a client wants to preserve their capital for investment purposes or they will need cash for a house renovation. And because of the details of the transaction, the client could put 5% down using MI or would have to put 10% down in order not to pay mortgage insurance using a second trust. If they have the reserves to put the "extra" 5% down, it still may not represent the best use of their money in their mind. Even if they are not undertaking renovations, perhaps they are more comfortable having larger cash reserves set aside for an emergency. This desire for safety may be especially strong for first-time buyers.
Speaking of renovations, this brings up another variable the client may want to consider. This variable concerns the fact that the MI can be cancelled in the future, while a second would typically need to be paid off over a longer period of time. I will cover these additional variables in more detail next week in part two of this series.
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].