Posted by Ronald * Starr(in No CA) on August 26, 2003 at 04:51:58:
First, please understand this is not “PMI,” which stands for “private mortgage insurance.” This is mortgage insurance, but it it FHA mortgage insurance and FHA, being a governmental entity, is not “private.”
The mortgage insurance continues for the length of the loan or until the loan is paid of.
If the loan is going to be such a low amount of the value of the property, why don’t you get a conventional loan? The lenders will not require private mortgage insurance when the LTV is so low.
I agree with your comment “why not just charge a higher rate?” By the way, when you use three questions marks where one will do, you lose question marks and perhaps other punctuation marks from your pool of alloted punctuation. Be economical and use one. You will regret it when you have an important question and have no question marks left to use.
At this time, the only explanation I have to offer is a theory of historical origination. FHA was the first organization to offer mortgage insurance, as far as I know. This was in the 1930s, when there were no electronic computers or calculators. THere were only mechanic calculators. So, to do the calculations for what rate of interest to charge to pay for mortgage defaults, it would have required long, tedious calculations. So they just added a figure for the mortgage insurance and then checked later to be sure it was at least covering the losses.
Used to be that people with FHA loans got a refund of part of their mortgage insurance money when they paid off the loan. That amount varied from year to year, depending upon the loss experience of the prior year, I believe. Or the loss experience for all loans taken out in the year that the property owner got their loan. Something like that.
Nowadays with sophisticated computers on everybody’s desks, it would make sense to just adjust the interest rate charged based on expected losses. The expected losses would be determined by recent loss history and perhaps some variables predicted for the future. So your comment makes sense to me.
Of course, if all lenders did this, the PMI industry would cease to exist. Maybe it is obsolete and should disappear. But how many organizations do you know, especially profitable ones, that want to voluntarily close their doors?
Good InvestingRon Starr**********