The Lending Coach

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

Category: Mortgage (page 2 of 15)

Can I Purchase a House with No Closing Costs?

Let’s get this straight and right up front: every real estate transaction will have closing costs – title fees, origination fees for a loan (if you need to finance the property), and recording fees, just to name a few.

So, how can a buyer purchase a house without actually paying those closing costs? Well, read on for more!

What this really means is that the closing charges are folded into the loan balance — if the house can appraise for the selling price plus the closing costs.

And there are pros and cons to doing this, as will be highlight later.

It’s also likely that not every single closing cost can be rolled into your loan. The buyer will most likely still be required to pay some fees at the settlement table. Those specifics will vary by lender.

I’m linking to a fantastic article by Hal Bundrick at Nerdwallet – he’s a personal finance writer as well as a certified financial planner.  You can find the entire article here…but I’ve highlighted a few excerpts:

What Are Closing Costs?

 “Closing costs” is a collective term for the various fees and charges you’ll encounter when buying a home. Some of these fees come from the lender and others come from third parties that are involved in the transaction, like home appraisers, homeowner associations (HOAs), and title companies.

How much are closing costs usually?

On average, homebuyers pay closing costs ranging from 2% to 5% of the purchase price. Unfortunately, this is only a ballpark figure, as there are many variables in each individual transaction. You can find out more specifics on closing costs here…

Many lenders will require that you apply for a loan prior to receiving a more precise estimate of closing costs; however, some lenders are more transparent with their available options and will do the necessary legwork to provide you a better idea of those costs.

Can you buy a house with no closing costs?

The reality is that closing costs have to be paid one way or the other – and by some or all parties in the transaction. Your decision will be whether you pay them with cash when you sign your loan, or as an added expense in each monthly mortgage payment.

How a no closing cost purchase works – it’s all in the financing

Per Bundrick in his article: “lenders can structure no closing cost loans in two ways. The differences between them are subtle, yet the result is the same.”

  1. You finance the closing costs. In this case, the lender will add your closing costs to your total loan balance. Your monthly payments will be slightly higher, and you’ll be paying these closing costs, with interest, for the full term of your loan — so, for example, over a period of 15 or 30 years.
  • The lender will absorb the closing costs in exchange for a higher interest rate. Again, you’ll pay a bit more each month, and your total interest cost will be greater over the life of the loan.

Either way, your monthly payment rises slightly. You’ll pay less at the closing table, but more over the long term.

Is a no closing cost mortgage a good idea?

The answer is….it depends!

If you are a little low on cash and have found your dream home, then yes – rolling $4,000 to $8,000 into your mortgage is a good idea.  It won’t increase your monthly payment by much and generally doesn’t impact qualification.

Also, if you plan on moving, selling, or refinancing in the short term, wrapping your closing costs into the balance can be a good strategy.

However, if you’re going to live in your new home for the long-term, you will pay more over the life of the loan by financing your closing costs or accepting a higher interest rate.

So if this is your forever home and you plan on keeping the mortgage for 7+ years, it’s probably best to pay the closing costs up front.

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!

Home Buyers and Mortgage Seekers – Beware of Online Credit Reports

U.S. Air Force illustration/Senior Airman Grace Lee

Many consumers are shocked to find out that their Credit Karma or other online scores do not match their true FICO score when it’s finally run by their mortgage lender.

This happens quite often – and it’s important to understand the differences and reach out to your mortgage professional first. 

Unfortunately, many would-be buyers have an incorrect view of their actual credit worthiness and begin looking at homes too soon in the process.

To repeat, the key thing to remember here is to reach out to your mortgage professional to get your official FICO score.

Dive Deeper

I’d invite you to find out the particulars here – as the free online credit products and the FICO score used in mortgage qualification process are noticeably different.  Essentially, they use different algorithms to come up with their own score. 

Most lenders determine a borrower’s creditworthiness based on FICO® scores, a Credit Score developed by Fair Isaac Corporation (FICO™). This score tells the lender what type of credit risk you are and what your interest rate should be to reflect that risk.

FICO scores have different names at each of the three major United States credit reporting companies. And there are different versions of the FICO formula. Here are the specific versions of the FICO formula used by mortgage lenders:

  • Equifax Beacon 5.0
  • Experian/Fair Isaac Risk Model v2
  • TransUnion FICO Risk Score 04

The Key Takeaway

The major takeaway is that your Credit Karma score will be different than your FICO score…and in most cases, the free, online score is better than the FICO score – at least that has been my experience.

Also, you can find out here how your credit score affects your mortgage rate – this is also worth the read!

Delayed Financing – A Great Purchase and Financing Option

Paying cash for a house has its advantages. Purchasing with cash rather than getting a mortgage could help you as the buyer win a bidding war when buying a new home. You may even be able to negotiate a lower price on the home if you’re paying cash.

After all, cash in hand is a sure thing, and a mortgage approval can take some time and isn’t always guaranteed.

Delayed financing is a specific program that allows the buyer to take cash out on a property immediately in order to cover the purchase price and closing costs for a property they had just purchased with cash.

How Delayed Financing Works

Delayed financing is a mortgage that is originated on a property after you already own it, in comparison to a typical mortgage that is used for the acquisition of a property. The delayed financing mortgage option allow buyers to compete with all-cash buyers when purchasing the property. 

By financing the property after the initial cash transaction, the borrower/buyer is able to regain their liquidity because the money isn’t tied up in the house after the delayed financing is completed.

Keep in mind that the value of the property might not the same as the purchase price. Borrowers will need an appraisal done by their new lender to determine the value.  Moreover, your new loan can’t be more than what you paid for the property plus your closing costs and lender fees.

Why Delayed Financing?

Delayed financing is generally helpful for:

  • Investors who want to compete with all-cash buyers’ short timelines
  • Investors who want to have more bargaining power because they’re paying with cash
  • A property that has multiple offers and the seller doesn’t want to wait on financing
  • Investment properties, vacation homes, and primary residences
  • An investor who wants to take their cash out and buy another investment property

The primary reason to utilize delayed financing is that buyers can stay liquid. Investors use delayed financing to recover their cash and be able to purchase another property.

Generally, delayed financing is right for an investor who wants to take advantage of all of the benefits of purchasing a home using all cash. They can often negotiate a lower price, close faster and compete with multiple other buyers. An investor who doesn’t immediately qualify for conventional financing may also opt for delayed financing.

An Investor’s Point of View

In this case, the buyer is an investor and purchases a property using all cash.  The buyer then wants to free-up some cash back to buy another property.

The buyer can then delayed financing to recoup the cash and take a loan out on the new property, utilizing the cash back from the initial transaction!

A Primary Occupancy Borrower’s Point of View

The buyer can also use this option to compete with all-cash buyers and negotiate better terms. Delayed financing can be done as quickly as three weeks after purchasing the property, which is different from a standard “cash-out refinance” transaction, where the borrower must wait six or more months.

How Long Do You Have to Wait to Refinance?

If you’re doing a delayed financing transaction on a property you purchased in the last 6 months, you’re allowed to take cash out immediately without any waiting period.

Under normal circumstances, if you bought a home with a mortgage instead of cash, you have to be on the title at least 6 months before you can take cash out and refinance your home, so delayed financing is a notable exception.

Delayed Financing Qualifications

There are certain qualifications that need to be met in order to qualify for a delayed financing transaction.  Most specifically, the property must have been originally purchased using all cash.

Lenders generally have the following qualifications for this type of transaction:

  • Arm’s Length Transaction: You can’t be related to or have a personal relationship with the seller
  • Closing Documents: Closing statement from the property purchase
  • Proof of Funds: Showing where you got the funds to purchase the property
  • New loan amount can be no more than the actual documented amount of the borrower’s initial investment in purchasing the property plus closing costs.
  • Appraisal: Ordered by the lender and paid for by you, generally $500-plus

There can be more needed and other regulations may apply, but these listed above are most standard.

Although you may have just ordered an appraisal when you originally purchased the property, as mentioned previously, the lender will want to conduct their own appraisal before they approve your loan.

It would be my pleasure to help any borrower with a delayed financing transaction, so don’t hesitate to reach out to me for more information or to get started!

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

How to use a cash-out refinance to purchase another home

Photo courtesy gotcredit.com

I work with a fair amount of second home buyers and investors – and am asked how to best go about financing these properties (and second homes), as well as their required down payments.

I recently ran across this article from Peter Miller at The Mortgage Reports – and it’s a great read for those looking to tap into home equity to purchase another home.

I’d invite you to read the full article here – and I’ll mention a few key highlights:

How much equity do you have?

At first, it may seem that the equity issue is simple. You bought a house for $150,000 and it’s now worth $275,000.

You’ve paid down principal, too, so your current equity is $190,000.

Can you really get a check for almost $190,000 from lenders?

Lenders generally will allow cash-out refinancing equal to 80 percent of your equity. They will see a property value of $275,000 and subtract 20 percent ($55,000). That will leave around $220,000. This money will be used to first repay the existing loan of $85,000. The balance – $135,000 – represents the cash available to the borrower.

With some program, you might do better. The VA cash out mortgage allows qualified borrowers to refinance up to 100 percent of their equity while the FHA cash out loan will go to 85 percent. However, these programs come with various charges and insurance costs that many borrowers with equity will want to avoid.

Cash-out refinance to buy another home

With cash-out refinancing, you can use the equity in your home for many things — but not for all things. For instance, you can use the money to pay for college tuition, to purchase a business, or buy another property.

Buying a second home or investment property

In terms of real estate, you can use real estate equity to immediately buy a second home or to purchase an investment property.

As soon as you close the cash-out refi, you can use those funds as a down payment on another home — or to buy the house outright — if you plan to keep the current home as your primary residence.

How to Go About a Refinance

Reach out to your lender to begin the application process.  He or she should be able to coach you through the process – and identify the key pieces that will help you make an informed decision.

I’ve helped numerous investors with this process, and I’d be glad to see if this option might work for you, as well!  Give me a call for more….

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!

Before Making a 20% Mortgage Down Payment, Do Read This

“How much should I put down on a house?”

It’s a question that I hear all the time from would-be home buyers— especially first-timer purchasers.

And, the answer is:  “it depends,” as it really will vary by buyer.

I’d highly recommend that you check out Dan Green’s article at The Mortgage Reports for more.

Per Mr. Green: “If you’re a home buyer with a good deal of cash saved up in the bank, for example, but you have relatively low annual income, making the biggest down payment possible can be sensible. This is because, with a large down payment, your loan size shrinks, reducing the size of your monthly payment.”

Or, perhaps your situation is reversed.

“Maybe you may have a good household income but very little saved in the bank. In this instance, it may be best to use a low- or no-down-payment loan, while planning to cancel your mortgage insurance at some point in the future.”

Dan continues: “One thing is true for everyone, though — you shouldn’t think it’s “conservative” to make a large down payment on a home. Similarly, you shouldn’t think it’s “risky” to make a small down payment. The opposite is actually true.”

“About the riskiest thing you can do when you’re buying a new home is to make the largest down payment you can. It’s conservative to borrow more, and we’ll talk about it below.”

For today’s most widely-used purchase mortgage programs, down payment minimum requirements are:

Remember, though, that these requirements are just the minimum. As a mortgage borrower, it’s your right to put down as much on a home as you like and, in some cases, it can make sense to put down more.

Larger Down Payments Actually Increase Risk

Green continues: “As a homeowner, it’s likely that your home will be the largest balance sheet asset. Your home may be worth more than all of your other investments combined, even.

In this way, your home is both a shelter and an investment and should be treated as such. And, once we view our home as an investment, it can guide the decisions we make about our money.

The riskiest decision we can make when purchasing a new home?

Making too big of a down payment.”

The Higher The Down Payment, The Lower Your Rate of Return

The first reason why conservative investors should monitor their down payment size is that the down payment will limit your home’s return on investment.

Consider a home which appreciates at the national average of near 5 percent.

Today, your home is worth $400,000. In a year, it’s worth $420,000. Regardless of your down payment, the home is worth twenty-thousand dollars more.

That down payment affected your rate of return.

  • With 20% down on the home — $80,000 –your rate of return is 25%
  • With 3% down on the home — $12,000 — your rate of return is 167%

That’s a huge difference. Please do reach out to me for more information so we can figure out the best down payment strategy for you!

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