The Lending Coach

Coaching and teaching - many through the mortgage process and others on the field

Category: Interest Rates (page 1 of 6)

Buying a Home Is the Most Affordable It’s Been in Almost 3 Years

Home prices have slowed a bit in some areas, but they continue to climb in the majority of markets in the U.S.  Inventory is stubbornly low in many parts of the country, but even with these factors, now is actually a good time to purchase.

Believe it or not, research shows that housing has actually become more affordable this year, despite home appreciation and tight inventory. Affordable homes are possible thanks to lower mortgage rates and greater purchasing power.

“Affordability is about the best it can be compared to what it is likely to be over the next few years. So, in that sense, it’s a good time to buy right now if you have the financial means.” –Lawrence Yun, Chief Economist, National Association of Realtors

However, this positive development may not last for too much longer. That’s why it pays to hunt for homes and mortgage rates now, as waiting could prove expensive.

I’m linking to an article from Erik Martin at The Mortgage Reports – you can find the entire piece here…

What The Numbers Show

Martin highlights a Black Knight study (found here) that shows “housing affordability hit nearly a three-year high in September.” Other findings from the report include:

  • The drop in mortgage rates since November has been enough to amp up buying power by $46,000 while keeping monthly principal and interest (P&I) payments the same
  • The monthly P&I needed to buy an average-priced home is $1,122. That’s down about $124 a month from November 2018, when interest rates were near 5%
  • Monthly P&I payments now require only 20.7% of the national median income. That marks the second-lowest national payment-to-income ratio in 20 months

Martin writes “that last point may be the most important. For the average home buyer, month-to-month housing costs are lower than they’ve been at almost any point in the last three years.”

Why Is Housing More Affordable Now?

Lawrence Yun, the chief economist for the National Association of Realtors, states that lower mortgage rates right now are helping to offset higher home prices.

“Assuming you put down 20% on a median-priced home, your monthly mortgage payment would be $1,070 at this time last year. That’s assuming a 4.7% mortgage rate at that time,” he says.

Today, your monthly payment on that same home could be down to $990 — $80 less — even though you would have paid more for the home thanks to rising real estate prices.

Will This Trend Continue?

Yun, and many other economists, believe that mortgage rates will likely remain attractive through 2020.

“But then they will rise, which will knock off many buyers from the pool of eligible purchasers,” predicts Yun. 

Should You Act Now?

Please do reach out to me so we can analyze your current situation to see if a home purchase might be in your best interest.  Based on the data, now is really the time to get started…and it would be my pleasure to help you.

Quick Credit Score Improvement Tips

Let’s talk credit, as it’s so important. Your FICO scores can determine whether you are able to purchase that home or not, and save you a good deal of money on the rate you’re going to pay if your scores are good.

Of course, you want to make your payments on time, but how can you actually improve your credit score in a relatively short period of time? What can you do?

Here are a few things that you might be able to do relatively quickly and improve your scores…

Lower The Balances

It’s a good idea to keep the balance you owe on any of those accounts below 30% of the credit line. If you have a credit card with $1000 limit on it, keep your balance to $300 or less.

Increase The Trade Line

So, what if your balance is higher than that and you can’t bring it down? Well, go to that credit card issuer and ask them if they’re willing to give you a higher limit. By bringing the limit up, the amount you owe becomes a smaller percentage of your limit. That will help your score.

Don’t Close Accounts

One key thing to remember, don’t close off any credit lines that you have from the past. That’s good history that you’ve built up. You want to keep that good history. It’s like getting straight A’s in high school and not wanting to show the report card. Keeping good history will help your credit score. 

Collection Accounts

Finally, think about some of those collection accounts – only if they’ve popped up. If the seven-year reporting period is up (starting from when you first went delinquent with the original debt), dispute the debt from your credit report. Any proof you have regarding the first date of delinquency will strengthen your dispute.

When All Else Fails 

If you’re not able to get the collection account removed from your credit report, pay it anyway. A paid collection is better than an unpaid one and shows future lenders that you’ve taken care of your financial responsibilities. Once you’ve paid the collection, just wait out the credit reporting time limit and the account will fall off your credit report.

If you have more questions about your credit and how it impacts your ability to finance a home, please do reach out to me, as it would be my pleasure to help!

The Cost of Waiting to Purchase a Home and Trying to Time the Market

If you’re shopping for a home today, you know it can be hard work. You might not find something right away and it’s easy to become frustrated and fatigued.

Sometimes buyers get discouraged and say, “Let me take off a few months, maybe I’ll come back 6 months later.”

Some, on the other hand, think that the market might weaken shortly or that interest rates will fall even further…and are trying to essentially “time the market” Is that the right strategy?

The Cost of Waiting

Here’s the potential problem with that thinking…while you might want to take time off and away from your search, the market isn’t taking time off!

The cost of waiting to buy is defined as the additional funds it would take to buy a home if prices & interest rates were to increase over a period of time.

The market is quite good in terms of appreciation right now in California and Arizona. The forecasted growth in value is 2.4% in just the next 6 months; let’s quantify that.

The Numbers

A home worth $300,000 today would be worth $7,300 more in 6 months. Additionally, if you were planning on putting the same percent down, you would have to borrow more because the home is more expensive.

What about interest rates? Rates today are at very attractive levels, so does it make sense to wait for rates to go down further…and what if they don’t?

No, the monthly savings with a lower rate are nice but are dwarfed by the missed appreciation and amortization, and it would take many, many years to recoup what you would have lost.

One other thing to consider…if rates drop significantly after your purchase, you can always refinance in the future to take advantage of that lower rate.

Today’s Data

Here’s the data from FHFA – see how the forecast is for nearly 5% appreciation in the year ahead. The longer you wait, the more you miss out on appreciation and the more expensive you new purchase will be.

Stick with it, keep shopping, and you will find something. Don’t hesitate to reach out to me with questions, as it would be my pleasure to help!

Mortgage Interest Rates and The Federal Reserve

I receive a number of questions regarding mortgage interest rates every time there is a meeting of the Federal Reserve Board. 

Most assume that the Federal Reserve controls mortgage interest rates…and, interestingly, that’s not the case.

I’m linking to a fantastic article by Dan Green at The Mortgage Reports – he does a great job in highlighting what really takes place with mortgage rates.  You can read the entire piece here…and I’ll highlight a few key pieces below.

The Federal Reserve Open Market Committee

The Federal Reserve Open Market Committee (FOMC) is a rotating, 12-person sub-committee within the Federal Reserve, headed by current Federal Reserve Chairman Jerome Powell. The FOMC meets eight times annually on a pre-determined schedule, and on an emergency basis, when needed.

The FOMC’s most well-known role worldwide is as keeper of the federal funds rate.

The Federal Funds Rate is the prescribed rate at which banks lend money to each other on an overnight basis.  It is not correlated to mortgage rates.

The FOMC met a few weeks ago and dropped the federal funds rate by .25 basis points to 1.75%.

The Federal Reserve does not control mortgage rates

Here’s a fantastic graph (courtesy The Mortgage Reports) that shows how the Federal Funds Rate does not track with the 30-year mortgage rate (the green section tracks the mortgage rate, while the blue section highlights the Federal Funds rate):

When the Fed Funds Rate is low, the Fed is attempting to promote economic growth. This is because the Fed Funds Rate is correlated to Prime Rate, which is the basis of most bank lending including many business loans and consumer credit cards.

For the Federal Reserve, manipulating the Fed Funds Rate is one way to manage its dual-charter of fostering maximum employment and maintaining stable prices.

The Federal Reserve can affect today’s mortgage rates, but it does not and cannot set them.

The Federal Reserve has no direct connection to U.S. mortgage rates whatsoever.

The Fed Funds Rate and Mortgage Rates

As Dan Green states: “It’s a common belief that the Federal Reserve ‘makes’ consumer mortgage rates. It doesn’t. The Fed doesn’t make mortgage rates. Mortgage rates are made on Wall Street.

Here’s proof: Over the last two decades, the Fed Funds Rate and the average 30-year fixed rate mortgage rate have differed by as much as 5.25%, and by as little as 0.50%.

If the Fed Funds Rate were truly linked to U.S. mortgage rates, the difference between the two rates would be linear or logarithmic — not jagged.”

With that said, the Fed does exert an influence on today’s mortgage rates.

Fixed Mortgage Rates vs. Treasury Yields

A far better way to track mortgage interest rates is by looking at the yield on the 10 year Treasury bond.  These two seem to track quite closely:

The 30-year fixed mortgage rate and 10-year treasury yield move together because investors who want a steady and safe return compare interest rates of all fixed-income products.

U.S. Treasury bills, bonds, and notes directly affect the interest rates on fixed-rate mortgages. How? When Treasury yields rise, so do mortgage interest rates. That’s because investors who want a steady and safe return compare interest rates of all fixed-income products…and investors move to these type of products to fulfill their needs.

What the Fed Says Impacts Mortgage Rates…and Bond Prices

Dan Green outlines how the Fed impacts rates: “the Fed does more than just set the Fed Funds Rate. It also gives economic guidance to markets.

For rate shoppers, one of the key messages for which to listen is the one the Fed spreads on inflation. Inflation is the enemy of mortgage bonds and, in general, when inflation pressures are growing, mortgage rates are rising.

The link between inflation and mortgage rates is direct, as homeowners in the early-1980s experienced.

High inflation rates at the time led to the highest mortgage rates ever. 30-year mortgage rates went for over 17 percent (as an entire generation of borrowers will remind you), and 15-year loans weren’t much better.

Inflation is an economic term describing the loss of purchasing power. When inflation is present within an economy, more of the same currency is required to purchase the same number of goods.”

Meanwhile, mortgage rates are based on the price of mortgage-backed securities (MBS) and mortgage-backed securities are U.S. dollar-denominated. This means that a devaluation in the U.S. dollar will result in the devaluation of U.S. mortgage-backed securities as well.

When inflation is present in the economy, then, the value of a mortgage bond drops, which leads to higher mortgage rates.

This is why the Fed’s comments on inflation are closely watched by Wall Street. The more inflationary pressures the Fed fingers in the economy, the more likely it is that mortgage rates will rise.

Economic Turbulence on the Horizon – Recession, Rates, and Real Estate

It does look like most economists are pointing to a recession (although most do think it will be relatively mild by historical standards) in the next 12 months.

A recession occurs when there are two or more consecutive quarters of negative economic growth, meaning GDP growth contracts during a recession.

When an economy is facing recession, business sales and revenues decrease, which cause businesses to stop expanding.

How do the economists know this?  And what does this mean for interest rates and real estate values?  Read on for more…

Recessionary Indicators

The Yield Curve

One of the major indicators for an upcoming recession is the spread between the 10-year US treasury yield and the 2-year US treasury yield.

While various economic or market commentators may focus on different parts of the yield curve, any inversion of the yield curve tells the story – an expectation of weaker growth in the future.

What does this inverted yield curve look like?  Here’s a good depiction:

Why does inversion matter?  Well, the yield curve inversion is a classic signal of a looming recession. 

The U.S. curve has inverted before each recession in the past 50 years. It offered a false signal just once in that time. 

When short-term yields climb above longer-dated ones, it signals short-term borrowing costs are more expensive than longer-term loan costs. 

Under these circumstances, companies often find it more expensive to fund their operations, and executives tend to temper or shelve investments.

Consumer borrowing costs also rise and consumer spending, which accounts for more than two-thirds of U.S. economic activity, slows.

Unemployment

Unemployment is a recessionary factor, too – as economic growth slows, companies generate less revenue and lay off workers to cut costs.

A rapid increase in the overall unemployment levels—even if relatively small—has been an accurate indication that a recession is underway.

Here’s a chart that shows what happens when unemployment starts to trend upward – and notice that recessions follow shortly thereafter:

As you can see, when things in the economy starts to slow down, one of the first things business do is to reduce their labor force.  The curve is flatting now, and unemployment might be ticking up soon.

Mortgage Rates During Recession

When a recession hits, the Federal Reserve prefers rates to be low. The prevailing logic is low-interest rates encourage borrowing and spending, which stimulates the economy.

During a recession, the demand for credit actually declines, so the price of credit falls to entice borrowing activity. 

Here’s a quick snapshot of what mortgage rates have done during recessionary periods:

Obtaining a mortgage during a recession might actually be a good opportunity. As mentioned, when the economy is sluggish, interest rates tend to drop.

Refinancing or purchasing a new home could be a great way to get in at the bottom of the market and make a healthy profit down the road. A borrower should be market- and financially savvy when considering large real estate purchases in a recession

Real Estate During Recession

Believe it or not, outside of the “great recession” of 2007 (which was caused, in part, to a housing crisis), home values and real estate actually appreciate historically during times of recession.

That seems counter intuitive…but because interest rates generally drop during recessionary periods, homes become MORE affordable to potential buyers (even though property values are higher), due to the lower payments provided by those lower rates.

When more people can qualify for homes, the demand for housing increases – and so do home prices.

In Closing

Although no one likes to see recession, you can observe that it actually can be beneficial for homeowners and would-be purchasers to refinance or purchase during these periods.

If you have more questions and or would like to strategize about purchasing or refinancing, don’t hesitate to contact me, as it would be my pleasure to help you!

The Top 10 Mortgage Questions a Borrower Should Ask

It’s a good idea to put together a list of questions to ask potential lenders in order find out which one will be best for you. These and other questions should help you choose the right lender and the best home loan.

How do I obtain pre-approval?

One of the best ways to ensure a smooth home buying process is what you do before you begin your home search.

Mortgage pre-approval, without the pressure of a closing date, is easier than trying to engineer a full approval from the ground up. And having a pre-approved mortgage means you can close faster when you’re ready to buy.

Ask the lender what documentation they need and what processes they have in place to secure and automated underwriting approval.  If they can’t provide that information, find another lender!  You can find out more about the pre-approval process here….

Which type of mortgage is best for me?

This question will help you know if you’re talking to someone who wants to sell you a loan quickly — or a trusted loan advisor who will be looking out for your best interest.

When you ask, “What are my options?” for a particular type of loan, the mortgage lender should dive deeper into your situation and ask YOU questions about your financial goals.  You can really gauge the professionalism of the lender by the questions he/she asks.

What’s your communication style?

Mortgage lenders can communicate with you in multiple ways – including by phone, email and text. Some are tech savvy and others prefer traditional methods.

The point is to be clear about what you prefer.

If you respond more quickly to text messages versus voicemail – tell your loan officer. Often times, there are time sensitive issues that arise during the loan process, so it will make everyone happy if your loan officer knows how to get questions answered, additional documentation etc. in a timely manner.

How often will I be updated on the loan’s progress?

You should be introduced to all parties that will be involved with your loan – from the originator, to the processor, and any other assistants.  Have their contact information handy during the loan process.

And how will you be updated on the progress: by email, phone or an online portal?  How often?

I recommend that you share your service expectations upfront, and check to see if the lender you are working with has these types of processes in place that meet your requirements.  If not, move on!

How much down payment will I need?

A 20% down payment may be nice, but borrowers have multiple choices. Qualified buyers can find mortgages with as little as 3% down, or even no down payment, depending on the property location.

Again, there are considerations for every down payment option and the best lenders will take the time to walk you through the choices, based on your stated goals. You can find out more about down payment requirements here….

Will I have to pay mortgage insurance?

If you put down less than 20%, the answer will probably be “Yes.” Even if the mortgage insurance is “lender paid,” it’s likely passed on as a cost built into your mortgage payment, which increases your rate and monthly payment.

You’ll want to know just how much mortgage insurance will cost and if it’s an upfront or ongoing charge, or both.  You can find out more about mortgage insurance here….

Are You Equipped to Approve Loans In-House?

Underwriters review loans and issue conditions before approving or rejecting a loan. Ask if the lender handles its own underwriting and does their own approvals.  This can be a make or break proposition if you need to close the loan in a timely fashion.

What other costs will I pay at closing?

Fees that are charged by third parties, such as for an appraisal, a title search, property taxes and other closing costs, will be paid at the loan signing. These costs will be detailed in your official Loan Estimate document and your almost-time-to-sign Closing Disclosure.

Your lender should be absolutely upfront regarding this. You can find out more about closing costs here….

How long until my loan closes?

Of course, you want to know what your target closing and move-in dates are so you can make preparations. And just as important: Ask what you should avoid doing in the meantime — like buying new furniture on credit and other loan-busting behavior.

Is there anything that can delay my closing?

Well, buying a home is a complex process with many stages and requirements. While delays are normal, the best way to avoid them is to stay in touch with your lender and provide the most up-to-date documentation as quickly as you can.  If you have any past credit issues or job related changes, let your lender know immediately to avoid any last minute delays.

5 Things Real Estate Agents Should Know About Mortgages

Unless all of your clients are cash buyers, mortgages are an integral part of any real estate agent’s business. Knowing some basics about mortgages will make you a better adviser to your clients and a more effective agent.

With that in mind, here’s a brief list of topics that real estate agents should understand in order to best help and advise their clients.

Although it is by no means necessary to become a mortgage expert, the following five mortgage insights will increase your value as a real estate professional.

The minimum down payment is not 20%

Most agents already know this, but a 20% down payment is the amount necessary for a buyer to avoid paying private mortgage insurance (referred to as PMI) on the loan.  There are many conventional loan programs require as little as 5% down.

For first-time homebuyers, recent conventional loan programs introduced to the market allow buyers to get a loan with only 3% down. If you work primarily with first-time homebuyers, you should also be aware of down payment assistance programs offered by local governments and municipalities.

You can find more about down payment options here….and here

Even move-up buyers should get a mortgage pre-approval

Many of the first-time buyers I work with get pre-approved so they know how much they can afford to spend on their new home. But not all realtors encourage move-up buyers to seek pre-approval, and I think they should.

The situation may have changed from the time their clients originally took out a mortgage. Even if they’ve built up a lot of equity, it may not help the buyer if their income or credit is not aligned with the price of the property they hope to buy.

Oftentimes, people who have qualified for a mortgage at one time are surprised by new and current restrictions and underwriting standards. For this reason, real estate agents should encourage their clients to speak with a mortgage broker even if the client thinks they already know the ropes.

This can help avoid surprises or disappointment further down the line and save time for agents and their clients.

Shopping around for a mortgage will not hurt your credit score

Shopping around for a mortgage with multiple lenders is highly recommended, and even though credit inquiries do impact a borrower’s credit score, there is an exception when it comes to credit inquiries from mortgage lenders.

All such inquiries made in the 30-day period prior to scoring your credit are usually ignored. Furthermore, inquiries outside of that 30-day period that fall within a typical shopping period are counted as only one inquiry.

You can find out more on multiple credit pulls here….

Condos have special underwriting requirements

If you’re working on a condo deal, it is in your and your client’s best interest to work closely with the mortgage loan officer to make sure the property meets the lender’s underwriting criteria. This is typically done through a condo questionnaire.

If you are the seller and state on your listing that the property can be conventionally financed, I highly recommend that you have the HOA documentation ready for the prospective buyer.

Among other things, they will be looking out for things such as pending litigation against the condo association, the percentage of units that are owner-occupied and whether any part of the building is used for commercial activity.

Many condo transactions are either seriously delayed or completely derailed by last-minute surprises that should have been discovered early in the process.

You can find out the specifics about condo warrantability here

Advertised rates aren’t always available

Some realtors encourage their clients to shop around for rates at the last minute or promise mortgage interest rates to clients that they have seen online. This can often lead to frustration because not everyone will qualify for those advertised, ultra-low promo rates and there may be additional stipulations such as a quick closing or mortgage insurance.

That’s why I personally don’t promise rates until I have a completed application and all supporting documents. No two files are the same, so it’s best not to promise something over which we have no control.

There is a lot more to know when it comes to mortgages – and like I stated early, there’s no reason to become a mortgage guru! With that said, these five tips will help you look like a more that capable advisor in the eyes of your clients.

If you have other questions or would like to dive deeper into any of these topics, don’t hesitate to reach out to me!

Summer 2019 Forecast – Buyer or Seller Market?

Most experts expect that the summer homebuying season will be quite strong. But a question remains about this real estate market: will it favor buyers, sellers, or both? Let’s take a closer look at who might benefit the most from the upcoming real estate buying season.

Remarkably, based just on consumer confidence, it appears that the summer homebuying season may be beneficial for both buyers and sellers.

According to Fannie Mae, one of the nation’s top mortgage investors, Americans are extremely optimistic about the housing market’s direction.

Growth typically means that it’s a good time to both buy and sell a home, and indicators are that Americans believe interests rates will stay relatively in check while their incomes will increase.

While consumer confidence may be high, some economists are ambivalent about the strength of the housing market.

There are some signs that the market is flattening, instead of continuing to race upward. Experts are actually divided on this issue, as home prices are still appreciating.

For instance, home sales at the national level are slowing slightly, although the rate of home appreciation is still increasing, albeit at a slightly slower rate. In addition, it’s taking a bit longer for homes to sell in some areas of the US, which means the days of homeowners benefiting from bidding wars might be on the wane.

This isn’t necessarily the case out west, as inventories are still low and there are more buyers that sellers. At the same time, with interest rates stabilizing, homes are still extraordinarily affordable, compared to historical norms.

So, who actually is going to benefit from the strong summer market?

Taking into account these facts, it looks like home buyers will have a slight advantage this summer. For starters, home prices are still on the rise but not as sharply as they once were.

Some sellers are also reducing their original listing price, which indicates they’re having trouble attracting buyers. Finally, the Federal Reserve has signaled that interest rates should stay relatively stable through the summer, which is the reason for the strong market, and as almost everyone knows, low interest rates are better for buyers. Rates have been steadily ticking downward over the last 2 months or so.

The summer homebuying season is going to be very strong, and tilted in favor of home buyers. If you’ve been thinking about buying a new home, now might be the perfect time – feel free to contact me for more information!

Source: Chicago Tribune

It’s Time To Seriously Consider a Refinance

Tapping into home equity by refinancing is more of a possibility today and becoming very popular for many borrowers.

As interest rates have moved lower in the last 3 weeks and housing values across the country continue to steadily increase, homeowners now have access to a much larger source of equity and possibly better payment terms!

With current mortgage rates low and home equity on the rise, many think it’s a perfect time to refinance your mortgage to save not only on your overall monthly payments, but your overall interest costs as well.

It’s really about managing the overall assets that you have in order to maximize the returns. Make sure you are working with the right mortgage lender to help in figuring out which product is best.

What is a Cash-Out Refinance?

A mortgage refinance happens when the homeowner gets a new loan to replace the current mortgage. A cash-out refinance happens when the borrower refinances for more than the amount owed on their existing home loan. The borrower takes the difference in cash.

Rates Are Down and Home Equity is Up

Since rising home values are returning lost equity to many homeowners, refinancing can make a good deal of sense with even a small difference in your interest rate. Homeowners now have options to do many things with the difference.

More home equity also means you won’t need to bring cash to the table to refinance. Furthermore, interest rates can be slightly lower when your loan-to-value ratio drops below 80 percent.

Here’s what many of my customers are doing with that equity:

  • Consolidate higher interest debt
  • Eliminate mortgage insurance
  • Purchase a 2nd Home or Investment Property (or a combination of both)
  • Home Improvement – upgrades to kitchen, roof, or pool

Benefits of Cash-out Refinances

Free Up Cash – A cash-out refinance is a way to access money you already have in your home to pay off big bills such as college tuition, medical expenses, new business funding or home improvements. It often comes at a more attractive interest rate than those on unsecured personal loans, student loans or credit cards.

Improve your debt profile – Using a refinance to reduce or consolidate credit card debt is also a great reason for a cash-out refinance. We can look at the weighted average interest rate on a borrower’s credit cards and other liabilities to determine whether moving the debt to a mortgage will get them a lower rate.  Some borrowers are saving thousands per month by consolidating their debt through their mortgage.

More stable rate – Many borrowers choose to do a cash-out refinance for home improvement projects because they want a steady interest rate instead of an adjustable rate that comes with home equity lines of credit, or HELOCs.

2nd Home or Investment Property – many borrowers are utilizing the value of the cash in their home to purchase rental properties that cash flow better then the monthly payments of the new loan.

Tax deductions – Unlike credit card interest, mortgage interest payments are tax deductible. That means a cash-out refinance could reduce your taxable income and land you a bigger tax refund.

Reasons NOT to Refinance

Terms and costs – While you may get a lower interest rate than your current mortgage, your cash-out refinance rate will be higher than a regular rate-and-term refinance at market rate. Even if your credit score is 800, you will pay a little bit more, usually an eighth of a percentage point higher, than a purchase mortgage. Generally, closing costs are added to the balance of the new loan, as well.

Paperwork headache – Borrowers need to gather many of the same documents they did when they first got their home loan. Lenders will generally require the past 2 years of tax returns, past 2 years of W-2 forms, 30 days’ worth of pay stubs, and possibly more, depending on your situation.

Enabling bad habits – If you’re doing a cash-out refinance to pay off credit card debt, you’re freeing up your credit limit. Avoid falling back into bad habits and running up your cards again.

The Bottom Line

A cash-out refinance can make sense if you can get a good interest rate on the new loan and have a good use for the money.

Using the money to purchase a rental property, fund a home renovation or consolidate debt can rebuild the equity you’re taking out or help you get in a better financial position. 

With that said, seeking a refinance to fund vacations or a new car might not be that great of an idea, because you’ll have little to no return on your money. 

It would be my pleasure to see if this type of plan might be a good one for you.

Mortgage Insurance – Mistakes to Avoid and How to Pay Less

Most loans with less than 20 percent down (for purchases) or home equity (for refinances) require some form of mortgage insurance. This can be pricey for some borrowers, so it’s important to have a strategy to deal with this type of insurance.

Everyone wants to pay less for mortgage insurance and with a little preparation and some shopping around that may be possible.

But before we look at lower costs, let’s first explain what mortgage insurance (MI or PMI for ‘private mortgage insurance’) really is.

I highly recommend that you read the entirety of Peter Miller’s post from The Mortgage Reports, although I’ve put together a few key pieces from his article below…and my article on Mortgage Insurance here…

For conventional (non-government) loans, it may be also be called PMI, or private mortgage insurance. FHA programs require mortgage insurance premiums (MIP) regardless of the size of down payment.

VA home loans call their insurance premium a funding fee. Some lenders may not require a separate insurance policy, but charge a higher interest rate to cover their risk.

Why 20 percent down?

Mortgage lenders really, really want you to buy a home with at least 20 percent down. That’s because it substantially reduces their losses if you don’t repay your loan and they have to foreclose.

However, most homebuyers, especially first-timers, don’t have 20 percent to purchase a property. The National Association of Realtors lists these figures for median down payments in 2018:

  • All buyers: 13 percent
  • First-time buyers: 7 percent
  • Repeat buyers: 16 percent

If you don’t have 20 percent down, most lenders force you to purchase mortgage insurance. The policy covers their losses if you default and they don’t fully recover their costs in a foreclosure sale.

How much does mortgage insurance cost?

What MI costs are you likely to face? For conventional mortgages, MI costs depend on your credit rating, down payment size, and type of loan you choose. For government loans, your credit score does not affect mortgage insurance premiums.

Here’s the advice that Peter Miller gives on how to pay less….

How to pay less for mortgage insurance

Mortgage insurance can be a big cost. For example, if you buy a home for $250,000 with 3.5 percent down, and get FHA financing, the up-front MIP will be $4,222. You’ll also pay annual MIP of $171 per month. After five years, you will have spent $14,482 ($171 x 60 plus $4,222).

Here are several strategies to reduce or eliminate mortgage insurance costs.

Go piggyback

Instead of getting one mortgage, get two. Try a first mortgage equal to 80 percent of the purchase price and a second mortgage for 5, 10 or 15 percent of the balance. You can then buy with no mortgage insurance. Here’s how that might work, assuming that you have a 700 FICO score, 5 percent down, and buy a traditional single-family home for $250,000:

  • First mortgage principal and interest, assuming a 4.5 percent interest rate: $1,013.
  • Second mortgage principal and interest, assuming a 7 percent interest rate: $249
  • Total payment: $1,263

A comparable 95 percent loan with 25 percent coverage looks like this:

  • First mortgage principal and interest at 4.5 percent: $1,203
  • Mortgage insurance: $108
  • Total payment: $1,311

In this case, the difference is about $50 a month.

Refinance

If the value of your property has grown, you may be able to refinance to a loan without MI, instead of without waiting until your balance is less than 80 percent. When refinancing, you want to try for a double MI whammy — a new loan with both a lower rate and no MI requirement. Speak with a loan officer for details; the monthly savings might be significant.

Look for refundable premiums

If you expect to be a short-term owner, look for mortgage insurance programs with refundable premiums. With the FHA, for example, you can get a partial refund if you pay off the loan within three years. And private mortgage insurers also offer refundable premiums. However, their upfront costs may be higher.

Reduce your risk profile

With conventional financing, you can significantly reduce what you pay for mortgage insurance by being a less-risky borrower.

  • Improve your credit score. Even a one-point increase can save you money if it puts you into a better tier
  • Make a larger down payment. Going from 3 percent to 5 percent can save you money, depending on the program
  • Choose a fixed loan over an ARM
  • Choose a loan with a term of 20 years or fewer

Cancellation

Conventional loan guidelines allow borrowers to request cancellation of their MI once their loan falls to 80 percent of the value of the home when you took out your mortgage. You must normally be in good standing with your lender to drop MI this way.

With FHA and USDA mortgage insurance, coverage continues for the life of the loan. For VA-backed financing, there is no monthly charge.

Automatic termination

Alternatively, mortgage insurance for conforming loans “must automatically terminate PMI on the date when your principal balance is scheduled to reach 78 percent of the original value of your home. For your PMI to be canceled on that date, you need to be current on your payments on the anticipated termination date. Otherwise, PMI will not be terminated until shortly after your payments are brought up to date.”

In Conclusion

Do reach out to me to discuss your down payment and mortgage insurance options, as it would be my pleasure to help you!

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