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Mortgage Sanity

Archive for April, 2007

Private Mortgage Insurance – PMI

April 19th, 2007

In the United States all VA and FHA mortgages are insured by the federal government.

Other types of mortgages, however, typically require some sort of mortgage insurance from a private mortgage insurer if the loan exceeds 80% of the value of the property. In any case, the borrower is responsible for paying for the insurance in one way or another. Private mortgage insurance essentially insures the top 20% of the loan (anything above 80%).

FHA and VA Mortgage Insurance
Recommmended Mortgage Lenders:

Lending Tree
- Bad Credit OK
- Purchase, Home Equity & Refi
- This company provides up to 4 loan offers from one application. They provide quick approvals and are one of the largest loan companies on the web. We recommend applying here first.

That is not to say that FHA (Federal Housing Administration) loans are exempt from mortgage insurance premiums–quite the opposite. The typical upfront mortgage insurance premium on an FHA loan is 2.25% but can be reduced to 1.75% if the borrower completes a course on home ownership. With VA (Veteran Administration) loans, the VA assumes the risk of default on the loan and these loans are therefore exempt from Private Mortgage Insurance. With almost all other loans, however, the lender insists on being protected in the event that the borrower defaults on their mortgage.

20% Down Payment

Recommmended Bad Credit Mortgage Lenders:

Lending Tree
- Bad Credit OK
- Purchase, Home Equity & Refi
- This company provides up to 4 loan offers from one application. They provide quick approvals and are one of the largest loan companies on the web. We recommend applying here first.Recommmended Bad Credit Mortgage Lenders:

Lending Tree
- Bad Credit OK
- Purchase, Home Equity & Refi
- Our#1 Recommended mortgage lender. They provide quick approvals and are one of the largest loan companies on the web. We recommend applying here first.Loans where the borrower pay 20% or more of the sales price of a home as a down payment are considered very low risk. Anything above an 80% LTV (Loan-to-Value) ratio is considered to be a higher risk because 1) there is less equity in the home and 2) the borrower has less to lose if the house goes into foreclosure. Typical conforming loans will require only 5% as a down payment (which translates into a 95% LTV). However, the higher the LTV, the higher the private mortgage insurance rate. In other words, as the risk increases from the lender’s point of view, the more they require the borrower to pay to ensure the loan does not go into default. This is not to be confused with homeowner’s insurance, which is required with virtually every mortgage. Private mortgage insurance protects the lender, while homeowner’s insurance protects the borrower (and inadvertently, the lender if their collateral is destroyed).

Loan To Value Ratio Determines the Rate of Insurance

Monthly mortgage insurance can vary greatly, and is mainly dependent on the LTV. 80% requires no mortgage insurance, 85% requires a higher rate of insurance, etc. Programs that offer 100% financing in a single loan carry the highest insurance premiums, and FHA loans and Adjustable Rate Mortgages require higher rates of insurance than conventional, conforming, fixed-rate mortgages. Also, the more money you borrow, the higher the rate of your PMI, as the default on a large loan will affect your lender much more than a smaller loan would.

Watch Your Equity To Drop Your PMI

If your LTV is 90% (you put down 10%), your PMI will cost about $43 per month for every $100,000 you borrow. If the lender pays the PMI for you, that PMI is tax deductible. Also, keep an eye on the property values in your area and compare that to your loan balance. Once you have 20% equity in your home, you can drop the Private Mortgage Insurance. Not only that, as of 1999, lenders are legally required to eliminate your PMI once you have reached 22% equity.

Subprime Mortgage Loans and PMI

You may be saying to yourself, “I have a mortgage with less than 20% equity and no one has mentioned anything to me about mortgage insurance”. If your loan was originated with a subprime lender, you are not required to pay private mortgage insurance; directly, that is. Subprime lenders have their own way of making up for not requiring you to pay PMI–they increase your interest rate. As your LTV rises above 80%, so does your interest rate.

“Piggyback Loans”

An increasing popular way to avoid that pesky Private Mortgage Insurance is to structure your loan into a first and a second mortgage. This loans are called “piggyback loans”. Say you are only able to put 5% down and qualify for a conforming loan. If the sales price was $180,000 and your loan amount was $171,000, your monthly PMI payment would be $95.48. That’s almost $100! Your loan officer or lender would probably compare that total monthly payment with an “80 – 15″ mortgage. That means you would take out two mortgages simultaneously; a first mortgage of $144,000 (80% of the sales price) and a second mortgage of $27,000, the combination totaling $171,000. The interest rate on your first mortgage would remain the same as it was with the 95% LTV loan of $171,000, but you wouldn’t have to pay the $95.48 in monthly PMI. The interest rate on the second mortgage would be higher, but it would be cheaper than paying the high PMI rate.

Lender Paid Mortgage Insurance

Another way of sidestepping PMI is to have the lender pay for it. This is called LPMI (Lender Paid Mortgage Insurance). With LPMI, the lender will agree to pay the mortgage insurance that you would normally have to pay in exchange for a slightly higher rate. A typical charge would be an additional 0.5% to your interest rate for LTV’s between 80% and 90% and an additional 0.75% for an LTV above 90%. Many lenders will pitch the higher rate and they will remind you that the interest is tax deductible, while the PMI is not. However, you are stuck with the higher rate for the life of the loan, whereas the mortgage insurance can be terminated once you reach 20% equity.

PMI Options

Ask your broker to compare the following scenarios regarding PMI: 1) paying one loan with monthly PMI that you pay separately; 2) having the lender pay the mortgage insurance (LPMI) in exchange for a higher interest rate; and 3) structuring the loan as a combo piggyback loan with a simultaneous first and second mortgage. The best deal could depend on your PMI rate, amount of money you’re putting out as a down payment, how long you plan on keeping your home or mortgage and even the rates your brokers lenders can offer. Not only will you be able to make a sound decision, but you’re much more likely to be taken seriously as a well-informed borrower and be given the best deal.

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Posted in Bad Credit Mortgages, Home Purchase

Tags: mortgage PMI Private Mortgage Insurance

Bi-Weekly Payment Programs

April 19th, 2007

The billboard or TV commercial reads, “Cut thousands of dollars off of your mortgage by converting to a bi-weekly payment plan!” Sounds too good to be true, doesn’t it? Well, it’s actually mostly true. A bi-weekly mortgage payment plan restructures your payment schedule. Instead of the traditional, one-payment-a-month mortgage payment, you make a half-payment every two weeks.

Bi-Weekly Payment Plans Mean More Money Paid to Your Principle Each Year
Recommmended Mortgage Lenders:

Lending Tree
- Bad Credit OK
- Purchase, Home Equity & Refi
- This company provides up to 4 loan offers from one application. They provide quick approvals and are one of the largest loan companies on the web. We recommend applying here first.

Think about it this way: there are 12 months in a year and if you make two half payments every week, you would be making a total of 24 payments during the course of the year. There are also 52 weeks in a year, and if you made a “half-monthly” payment every two weeks, you would be making a total of 26 payments during that year. Assume your monthly principal and interest mortgage payment is $1,000 a month. Normally, you would pay $12,000 a year, right? In a bi-weekly payment plan, you are effectively making two extra “half-payments” a year (26 minus 24), which is equal to one full monthly payment per year and you would be paying a total of $13,000 instead of $12,000 over the course of the year. If you make sure that your extra payment is going towards paying down the principal on your mortgage, you will shorten a 30-year mortgage to about 5 to 8 years, depending on your interest rate.

Payments Can Be Automatic and Timed With Your Paycheck

This idea appeals to many borrowers, especially because many people are paid every other week and the lender can set the payment up to automatically transfer your payment from your bank account. This also has a positive emotional impact on the borrower, as they feel that they are being responsible and proactive about paying off their mortgage early. Sounds great, right?

Costs to Set-up

Yes, it sounds great, but as the old adage goes, if something sounds too good to be true, it probably is. Setting up a bi-weekly payment program can cost you $300 – $500 or more on both a new loan or if you wish to convert your current loan into a bi-weekly payment schedule. Also, your lender will most likely charge you $4 – $5 for each and every payment transferred from your bank account. Don’t get me wrong, I am all in favor of paying down your mortgage if you are able to accelerate your payments, but there is absolutely no reason to enter into a bi-weekly payment program. Here’s why:

Set Up Your Own Bi-weekly Payment Plan

You can easily set up your own bi-weekly payment plan. All you need to do is take your monthly mortgage payment ($1,000 for example) and divide it by 12. That comes to about $83. Send in an extra $83 every month ($1,083 total) and you’ve effectively reaped the benefits of a bi-weekly mortgage without the hefty conversion/start up fees or the transactions fees. Another way to shorten the term and reduce the total interest paid on your mortgage is to send in one full extra payment a year (13 total payments instead of 12). This may make sense if you receive annual bonuses or are paid in lump sums or commissions as opposed to hourly or salaried employees. On a $150,000 mortgage, bi-weekly payments will save you about $40,000 in interest over the life of the loan!

Requires Discipline
These methods described require a certain degree of self-discipline. Also, if you don’t plan on staying in your home for the remainder of your mortgage term, you may lose some of the benefits of continuously paying down the principal over the period of 30 years. Just remember that the advantages of a bi-weekly mortgage can be yours without involving a third party or forking over large fees.