interest only mortgage

Can I Obtain an Interest Only Mortgage Loan?

An interest only mortgage loan is a loan that you only pay interest on until the interest only period is over – usually in five or 10 years. Because you just pay interest charges every month, the payments are lower than a regular amortizing loan. All interest only mortgage loans eventually convert to a regular amortizing loan with higher payments after the interest only period ends. Interest only loans are still available with higher down payments, typically 25%.

Why Get an Interest Only Loan?

Interest only mortgages are appealing in some circumstances because they payment is lower.

Below are some common reasons that people get interest only home loans:

  • Buy a bigger house. You can buy more house with a loan you only are paying interest on. Lenders determine how much you can afford to borrow based upon your monthly income and your debt to income ratio. If you have lower payments with an interest only loan, you should be able to borrow more money. If you are very confident that you can afford a more expensive home and will be able to afford higher payments later, this can be a good choice.
  • Frees up funds. Lower monthly payments mean you choose where to put your money. If you like, you can put that money towards the principal on the loan. Or you can put that money into a real estate investment or mutual fund. The nice thing about interest only is that you have the option of paying more but are not required by the contract to do so.
  • Keeps your costs down. There are times when an interest only loan is the only way you can afford the home right now. Interest only loans can be an option to paying rent, knowing that you will eventually be paying off principal.
  • More interest to write off on taxes. You can generally write off mortgage interest on your home on your taxes. Paying more interest means more write offs. But this is now limited to mortgage debt of $750,000 and less, according to new tax laws in 2018.
  • No mortgage insurance. You do not generally need PMI on these home loans as they require higher down payments.

Considerations and Downsides

It is key for you to really understand the benefits of interest only and not the temptations. Interest only loans only will work if you are using them responsibly. Remember, an interest only loan is only temporary. The time will come when you will need to start paying principal, and then the payment will jump substantially.

For instance, if you have irregular, commission-based income (think of a real estate agent), you can keep the minimum payment on your home very low when you have no or less income. But when you get a big commission, you can overpay on the mortgage and pay off a chunk of principal. This is a perfectly responsible way to use an interest only home loan. But you need to have discipline to pull it off.

In some cases, making a big payment against principal can get you a lower minimum payment in later months, but you should check with your lender as this can vary.

Here are some other factors to consider about interest only loans:

  • You are not building equity. You do not get any equity in the property with this loan. You can build your equity if you make extra payments, but it is very easy to just make the minimum payment and not put more money into the home.
  • You risk going underwater. Paying down the loan balance over the years has many upsides. It is especially useful when it comes time to sell the home. If by the off chance your property value has declined, it is possible to owe more than the home is worth. If that happens, you have to write a huge check just to sell. If you are not paying down the loan for years, you are at a higher risk of getting into this situation if property values drop. This is exactly what happened in the last downturn to millions of home owners. When home values tanked, many were underwater on their loans and could not sell. Many defaulted.
  • Putting it off. You will eventually need to pay off the loan. Taking an interest only loan only delays this. Many ‘think’ they will be making more money in XX years, but who knows? You may be better off settling for less home today and getting a regular home loan that amortizes.

The takeaway is interest only home loans are not all bad. There are legitimate reasons for them. The problem is that you need to stick to your plan and use the extra money you are saving each month for a legitimate purpose and make extra payments on principal when you can.

mortgage insurance payment

Mortgage Insurance –  Is Paying This Every Month a Necessary Evil?

Even in 2018, some home buyers have enough money to make a big down payment on a home, but many do not. Many first time home-buyers in particular lack equity in another property and cannot make at least a 20% down payment. And if you cannot swing putting 20% down, you need to become familiar with mortgage insurance.

Mortgage insurance is usually required for borrowers who are unable to put down at least 20% on a home. Mortgage insurance is required by most lenders because if you want to borrow a lot of money and do not have a large down payment, the bank is exposed to more risk. People who do not put down big down payments are more likely to default on the loan.

With private mortgage insurance (called PMI with conventional mortgages and MIP with FHA mortgages), you pay extra money up front and each month to pay for insurance that will cover most of the loan balance if you stop paying. With this type of assurance, the lender can lend money to borrowers with smaller down payments.

Mortgage insurance helped the last financial downturn from being even worse; it is estimated that 11% of mortgages in effect in 2007 to 2010 were at least 30 days late, and millions of homes did eventually foreclose. That’s one of the reasons why many banks and lenders do not offer the no PMI loan.

Convention Loans and Mortgage Insurance

If you are getting a conventional mortgage and have less than 20% down, you must get PMI. The premium that you pay will vary based upon the loan to value of the property and your credit score. Whether the loan is fixed or variable also will affect the rate.  The more money that you can put down, the less you will need to borrow and the less you will pay for PMI.

Your PMI is tied to the LTV, so the amount you pay monthly will slowly decline as you build more equity. Building equity simply means you are paying off some of the loan over time and you own a bigger percentage of the house.

The good news with PMI, while a necessary evil for many borrowers, is that it can be cancelled once you have reached 78% of the home value or sales price, whichever one is less. The bank is required by federal law via the Homeowners Protection Act of 1998 to cancel the insurance. If you believe your home value has increased, you could negotiate for PMI to be cancelled earlier. But you will probably need proof in the form of a new appraisal to convince the lender.

But do not rely on the lender to let you know when you can cancel PMI. As you can probably guess, many lenders will drag their feet in cancelling PMI. The bank will make more money off you if you continue to pay for PMI past the 22% equity mark. So, be proactive and keep tabs on how much equity you have in the home. When you are approaching 20% equity, contact the bank and let them know you expect that they will cancel PMI soon.

FHA Loans and MIP

Mortgage insurance for FHA home loans is similar but a bit different. You need to pay for the mortgage insurance premium up front and an annual mortgage insurance premium that is paid each month as part of the mortgage payment. FHA mortgage insurance is more expensive than conventional, but at least you pay the same amount regardless of your credit profile.

One thing to know about FHA mortgage insurance is the date June 1, 2013. If your loan was closed after this date, you must continue to pay mortgage insurance for the life of the loan. The only exception is if you put down at least 10%. In this case, MIP can be cancelled after 11 years. Yes, this policy sucks. That is why once you have at least 20% equity, you should strongly consider refinancing your home loan into a conventional loan so no mortgage insurance is needed. However, if interest rates have risen since you closed your FHA loan, you may not want to do this. You would be wise to keep an eye on mortgage rates and when they are at least .5% below your FHA rate, you may want to consider a refinance. It is absurd in our view to pay mortgage insurance premiums when you have far more than 20% equity in the home.

VA Loans – Good News

If you have a VA-mortgage loan, you have a great deal. Not only can you get 100% financing and rates even lower than FHA: You also do not have to pay for mortgage insurance! There is a one time  funding fee for the loan up front, but no monthly mortgage insurance payment.

The bottom line is that mortgage insurance is a necessary evil for many Americans. But once you have 20% equity, you should either request it be cancelled, or refinance out of your FHA loan into a conventional so you no longer are paying that extra pesky payment each month.

 

 

References: https://smartasset.com/mortgage/mortgage-insurance

pmi tax deduction

Are Private Mortgage Insurance Payments Tax Deductible?

Home buyers who put down less than 20% at closing must buy private mortgage insurance. This can significantly increase your mortgage payment. A typical monthly private mortgage insurance payment is $100 to $200 per month for the typical $200,000 home in the US. But the good news is that mortgage insurance payments are often tax deductible, at least as of 2018.

The Tax Relief and Health Care Act introduced the private mortgage insurance deduction in 2006. Congress extended the benefit in 2015 when it passed another tax relief law. Under the terms of that law, the tax deduction expired at the end of 2016. The extension was only for one year. Since then, the US government has been renewing the tax deduction.

The private mortgage insurance tax deduction is one of the deductions that the federal government reviews every year and it will probably be addressed at some point under the recent tax reform law passed by the GOP.

tax deductionMost taxpayers who claim this deduction are middle class earners; the tax deduction phases out when you get into higher income brackets. At this time, deductions for mortgage interest and real estate taxes are also still good; they have been reduced to a limit of $750,000 and $10,000 respectively, however.

If you must pay for mortgage insurance, you should still be able to tax deduct those payments for the most part, depending upon your income. This helps to ease the bite of mortgage insurance at least at tax time!

References: why PMI is tax deductible  and answers on mortgage insurance premiums

More About Mortgage Insurance and PMI

Lenders usually require private mortgage insurance to secure the debt if you stop paying the mortgage. It is charged to the home buyer who cannot make a 20% down payment. The mortgage insurance policy can be issued by a private insurance company or by the FHA, USDA or VA, if you get a loan backed by one of those US government entities.

At this time, the mortgage insurance premium deduction applies to loans that were taken out on or after Jan. 1, 2007. The insurance policy must be for a first or second home. For most people, you cannot rent out the second home; it is intended to be for vacation homes. But you might still qualify for the deduction if you treat your second home as a business asset. However, home equity loans do not qualify for this deduction. Nor do cash out refinances.

You may not claim the mortgage insurance tax deduction if your adjusted gross income is higher than $109,000, or $54,500 if you are married and you file separate tax returns. The deduction starts to go away at $100,000 for single filers, and $50,000 for married taxpayers with separate tax returns. The phase out requires that you take off 10% from the premium amounts that you paid for every $1000 that your income goes over $100,000 or $50,000.

Mortgage insurance premiums that you paid during the last tax year are reported to the IRS on Form 1098. You should get this form from your lender after the tax year closes. There is no limit on the amount of the deduction that you can claim, if you qualify.

You can deduct the entire amount, and prepaid insurance premiums may be allocated over the term of your entire loan or 84 months, whichever is shorter. Note that mortgage insurance premiums are a type of itemized tax deduction. You report them on line 13 of Schedule A.

 

home equity

I Need Money but Don’t Want to Refinance My Mortgage.  Where Do I Get a Home Equity Line that Has a Great Rate and No Annual HELOC Fee?

Homeowners who need cash often turn to their own home to fund their needs. One way to do this is to refinance your first mortgage and take out cash; this is referred to as a cash out refinance. But what if you are happy with your current interest rate and do not want to refinance your home? Your best option is a home equity line of credit, or HELOC.

In most lending circles, a HELOC is considered a 2nd lien on your home. It is a line of credit based upon the equity in the property. The home equity line of credit is secured by the property so you can usually get a low interest rate on this type of loan. The only downside on a HELOC is you can lose your home if you do not pay the loan.

In some cases, a HELOC can give you access up to approximately 85% of the value of the home, minus what you owe on it. The amount you can borrow also is affected by your credit score and your income.

Does the Home Equity Line of Credit Work Like a Credit Card?

Let’s assume you have a $500,000 house with a $300,000 balance on the first mortgage. The lender will allow you to access 85% of the value. So, you can access up to $425,000, minus the $300,000 you owe, or $125,000.

Remember that HELOCs have an interest rate that can change. So, as the baseline interest rate increases and decreases over time, so can your rate. To set this rate, the lender starts usually with the prime or LIBOR rate, and then adds a markup based upon your credit score. A variable rate means you can end up paying a lot more on the loan down the road. So, you should keep this in mind. If your income falls, you could have trouble making payments and keeping your home.

When a HELOC Makes a Lot of Sense

Many homeowners like to use a HELOC as a low interest way to make repairs and upgrades to their home. When you make certain repairs on the property, the value of the home will be increased. Popular upgrades are windows, kitchens and bathrooms; these, if done affordably and within reason, can add substantial value to the property. Beware of using a HELOC to pay for things that do not pay you back, such as cars and vacations. These types of expenditures are how people got in financial trouble in the financial crash.

Should You Get a HELOC or Home Equity Loan?

A HELOC provides you flexibility of tapping equity in your home in the amount you need. You are approved up to a certain credit line, say, $50,000, but you do not have to use all of it at once, or even ever if you choose not to. You will only pay interest on the amount that you take out.

Another option is to get a home equity loan. This type of second mortgage gives you a lump of cash all at once. If you need all the cash at once for a big expenditure, you may consider this option. You will pay interest on the entire amount with a home equity loan. It features fixed interest payments over the entire loan term. You will know exactly what you are paying each month and when the loan is paid off. The home equity line is more variable.

In the past, homeowners cherished home equity financing, because it was tax deductible. In 2018, we have seen many revisions to the tax codes for deducting interest on mortgages and credit lines. According to the RefiGuide.org, there are still tax deductions available to homeowners if they are using the funds of a HELOC for home improvement purposes. References: https://www.refiguide.org/guide-heloc-loans/ and  https://www.irs.gov/publications/p936

Where Can I Obtain a HELOC Loan with a Reasonable Interest Rate and No Annual Fee?

Whether you get a HELOC or home equity installment loan, the best rates go to people with good incomes and credit scores. Also, the more you shop around, the better off you will be. It is smart to check your bank; you could get a discount as a current customer. A credit union can be a good deal too, especially if you are a member. Check with a standard mortgage broker too, who has access to many types of loans. In 2018, the average mortgage lender or broker is unlikely to offer home equity products like they did ten years ago. There are style specialty mortgage companies that offer home equity lines without excessive closing costs or annual fees, so look around.

If you are getting a credit line secure by your home, you may be tempted by low rate, introductory offers. Be aware those low rates only last a few months to a year or so, and then can go up based upon market conditions.

A HELOC can be an excellent source of low interest cash for things you need. The interest rate on the loan is low at first but can go up over time. If you put that money back into your home with improvements, you really can make out well when you sell the property.

But remember that people got in trouble with credit lines in the last financial crisis. They overspent on things they did not need with money from their home, interest rate rose, and they defaulted. You do not want this to happen to you. So, use your home equity wisely on things that give you a solid return on your money.

 

 

 

mortgage statement

What Your Loan Servicing Company Isn’t Telling You About PMI and Why You Don’t Need to Pay It Ever Again.

Many Americans buy a home with less than a 20% down payment. Being able to put down less money to enjoy the American Dream opens up home ownership to millions of people who may not have been otherwise able to buy. But buying with a lower down payment usually means paying for monthly private mortgage insurance or PMI.

PMI protects the lender if you default on the mortgage. The risk of default is higher on a property with down payment less than 20%. PMI typically costs many home buyers $100 or $200 per month and is a percentage of the price of the home.

Home owners often are irritated that they must pay for PMI as it is an extra expense on top of the mortgage principal, interest, taxes and home owner’s insurance. But your loan servicer may not tell you that you do not need to pay for PMI in most cases forever. Because they do not say anything, some homeowners may pay for PMI far longer than they need to. It is possible you could pay thousands of dollars to the lender when you did not need to.

How to Get PMI Cancelled

As a homeowner, it is important to know when you can have PMI cancelled. When you have reached 20% equity in the property through your payments and/or appreciation, you have a legal right to have PMI cancelled. You can check your loan documents for the amortization schedule to see at what point during the loan that you have 20% equity.

It also is possible you could reach 20% equity faster based upon home appreciation. If you think that your home has appreciated markedly, you may need to pay for a current appraisal to show the lender what the current value of the home is.

If you think you have 20% equity in your home, you need to request in writing that PMI be cancelled. You should provide your evidence in the letter that you have 20% equity. The usual proof required is a state certified appraisal; the URAR 1004 report is what is required for single family homes.

Most mortgage lenders will require you to fill out a form to request the PMI be removed. Keep in mind that you must demonstrate a good payment history for PMI to be cancelled. If you have missed any payments in the past 12 months, the lender may want you to make another year of timely payments before they cancel the policy. But some lenders may want to see that you have more than 20% equity before they will cancel the mortgage insurance. Some of them may want to see 25% equity. However, it is important to know that the mortgage lender is required under federal law to cancel your mortgage insurance once you have 22% equity, or 78% loan to value. Many loan servicers may not want, you to know this and they probably will not tell you. So, if you are getting close to this point in your loan, be aware that they must cancel the policy at that point if you have been making on time payments.

Tips for Cancelling PMI

First, make sure that you contact the proper mortgage lender. The original lender often sells the loan to another company. If you have any questions, talk to the lending officer who first handled your loan; he or she can tell you who to contact to request PMI be cancelled.

Second, the Homeowners Protection Act mandates that servicing lenders make homeowners aware of the PMI they are paying for and how to have it cancelled. Any questions about this, you should check your loan paperwork. As noted above, the lender is required to provide an amortization schedule for the entire length of the loan. That document will tell you when you will reach 20% equity. But you could reach that point faster because of appreciation.

Third, another option to cancel PMI is to refinance into a no-PMI mortgage. If you have 20% equity, the other lender will not require PMI. This could be an option if you want to refinance into a lower rate or even pull out cash. You could have to wait to refinance the loan for at least two years to get out of PMI. Check with your lender.

Fourth, you can get rid of PMI faster if you overpay on your loan; even paying $50 extra per month can make a substantial difference over time.

Fifth, remodeling the home to increase the value can help you to cancel PMI faster. Experts recommend upgrading a kitchen or bathroom or replacing the windows to boost the value substantially.

The key takeaway is that PMI is an extra expense that is worth getting rid of as soon as you can. Follow our tips above so you can stop paying for it as soon as possible.

 

References: https://www.bankrate.com/finance/mortgages/removing-private-mortgage-insurance.aspx

 

Big Brother, Big Banks, Big Insurance, Big Profits on the Backs of Declining Middle-Class

Although the economy is doing well, and the unemployment rate is low, there are still millions of Americans living paycheck to paycheck. Some estimates are there are 45 million Americans who are living in poverty, depending upon how poverty is measured. Even though there is much more technology and productivity these days, the median family income is $5,000 lower than 20 years ago.

Half of Americans have less than $10,000 in savings and millions do not know how they will ever be able to retire. Real unemployment is probably close to 10%, when you count all the people who are not able to find work and have to settle for part time.

Of course, Wall Street and the big banks are doing well. Some argue that greed, recklessness and illegal behavior were major factors in driving the country into a very bad recession. Millions of Americans lost their homes, jobs, savings and the ability to send their children to college. Today, the middle class is still suffering somewhat the effects of what financial institutions and insurance companies did to the US 10 years ago.

Since the market crash, it has become common to read about large financial institutions being fined or reaching settlements for questionable behavior. During the financial crisis, taxpayers were told that they needed to do bailouts for these big financial institutions because they were too big to fail. The argument was that if they went down the tubes, we would have a depression.

Still, three of the four biggest financial institutions in the country today – Morgan Chase, Bank of America and Wells Fargo – are 80% bigger now than they were in 2007 a year before US taxpayers bailed them out.

Many argue that no one financial institution should be so big that the failure would cause a major financial risk to Americans and to the US economy. No one financial organization should have such large holdings that the failure of it would spiral the world economy into a crisis.

As of 2016, there were only six huge financial organizations that had assets of $10 trillion. This is 60% of the country’s GDP. These large banks deal with 2/3 of the credit card purchases in the country and write 35% of home mortgages. They also control half the bank deposits in the US.

Some argue that if Teddy Roosevelt were alive he would break up these big banks, and some politicians have proposed to do so in the past. There have been bills written that would mandate financial regulators within a year to identify and break up giant banks and financial institutions such as JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs, Wells Fargo and Morgan Stanley. The idea behind this would be that they cannot cause another financial crisis like the one that swamped the country in 2008.

That legislation, while it has not been passed of course, was endorsed in 2015 by the Independent Community Bankers of America that represents 6000 banks. Their support was a big recognition that banking functions should be boring and the situation today still has too much risk and, some would say, too much stress on making money.

Many argue the function of banking should be to provide affordable loans to people and businesses so that jobs can be created, and also for people to be able to afford to buy homes, cars and so on.

Another problem with the current regulatory environment is that the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, while it was intended to banish financial institution abuses of consumers, it has led to more problems for middle class taxpayers. Recent research has showed that after Dodd-Frank, the number of mortgages given to the middle class dropped by 15%, but for the wealthy, they increased 20%. It was determined that Dodd-Frank changed mortgage lender origination behavior, as it increased the costs of originating loans.

Lenders were faced with more costs of origination and costs of compliance even before Dodd-Frank was passed. It makes sense that lenders began to focus more of their business on bigger loans for wealthier customer, so the lenders and banks could make more money. Big lenders also may offer more financial services than smaller banks, so it makes sense to acquire wealthy customers as they make the banks more money. Thus, the biggest drop in loan originations for middle class buyers was for the big banks.

When politicians promote new financial regulation, the general aim is to protect consumers. But it is important for regulators to be aware of the changes of incentives of private companies who will react in their own ways. In the case of the Dodd-Frank law, many middle-class taxpayers found that they were unable to get cheaper mortgages after the law was passed. In fact, many of them were unable to get a mortgage at all.

 

References:  http://thehill.com/blogs/pundits-blog/finance/328998-how-dodd-frank-hurt-the-middle-class and https://www.huffingtonpost.com/rep-bernie-sanders/break-up-big-banks_b_7233284.html

 

FHA Home Purchase and Refinance Applicants Are Penalized with Mortgage Insurance in Perpetuity Because of Reverse Mortgage Losses. Fair?  We think not.

As home buyers decide between an FHA and conventional mortgage, it is important to consider the matter of mortgage insurance. On a conventional mortgage, if you put down less than 20% down payment, you must have mortgage insurance until you have reached 20% equity. At that time, you can request that the insurance be cancelled.

Most FHA finance programs today are different. If your loan was written after June 2013, you usually have permanent mortgage insurance. Even if you have more than 20% equity in the property, you will have to pay for the insurance every month of the loan. The only exception is if you put down 10% or more; in such cases, you may cancel the insurance in year 11.

Is FHA worth paying mortgage insurance every month? That is the question.

Below is more information about FHA mortgage insurance that will help you decide if FHA is right for you.

FHA Mortgage Insurance Overview

Mortgage insurance is a policy that protects the lender and mortgage servicer from losses if you default on the loan. Most loans, as we noted earlier, require a 20% down payment to avoid mortgage insurance. But FHA now requires it for almost all loans.

Mortgage insurance for FHA loans is not cheap. You first must pay an upfront premium of 1.75% of the total loan amount. This premium can be paid at closing, or you can have it rolled into the loan amount. Note if you do the latter, the loan will be more expensive.

That is not all. You also must pay an annual mortgage insurance premium that is added to each loan payment. Depending upon the size and term of the loan, the expense will be from .45% to 1.05% of the amount of the loan.

For instance, if you have a $200,000 loan with $7,000 down or 3.5%, the upfront premium will cost you $3,370. If you pay 1.05% of the loan amount per year, that is $2,026 per year or about $169 per month.

Clearly, FHA mortgage insurance is expensive. So why get financing with a FHA program? FHA financing is much easier to qualify for; if you have a 580-credit score, you can still sometimes get an FHA insured loan with 3.5% down. For many Americans, an FHA program is the only option for them. In that case, it can be a perfectly acceptable financial decision. After all, if you wait until you qualify for a conventional loan with a higher credit score, you will need to pay rent for years longer. Many view renting as a waste of money. It is best, in this way of thinking, to buy as soon as you can, even if it comes with expensive mortgage insurance.

Cancelling FHA Mortgage Insurance

It was once easier to cancel FHA mortgage insurance. But in 2013, the reserve fund for the FHA program became too low, and new rules were passed so that most buyers must pay for mortgage insurance for the life of the loan. If you bought your home after June 2013, you will usually need to pay mortgage insurance for the life of the loan. For those with 10% or more down, you can cancel the insurance after 11 years.

So, is there any way to get rid of mortgage insurance if you put down less than 10%? It is possible that the rules can change again; the FHA commissioner has the authority to alter the regulations so that people can cancel mortgage insurance. If this does not happen, there is one other option: Refinance into a conventional loan once you have 20% or more equity. You will not need to pay mortgage insurance anymore with a conventional loan.

To do so, you need to improve your credit score. You can get FHA financing with a credit score in the high 500’s. But to get a loan approved with a conventional lender, expect to require a credit score of at least 620 and 640 will make it easier. Check the minimum credit scores needed for a FHA loan today.

The important thing to remember with FHA mortgage insurance is that it is an expensive fact of life if you have a lower credit score, and/or have a past financial problem on your credit report, such as a bankruptcy or foreclosure. While it is not an ideal option to pay for mortgage insurance for the life of the loan, it still can be a good decision to make financially. Anything beats paying rent for years and years.

Always reevaluate your situation and see if you can find a competitive mortgage with no PMI required. If you have an FHA insured lien, make it a goal to raise your credit score within a few years and refinance out of the loan into a conventional loan. You just need to determine when you will have 20% equity, so you can avoid mortgage insurance on the conventional loan.

pmi loans

Double Digit Growth for Real Estates Dirty Little Secret. PMI Companies the Curtain Is Pulled Back.

Most Americans who pay for private mortgage insurance very month, also called PMI, do not like paying for it. PMI protects the lender against loan default for those who put down less than 20% when they bought the home. For most mortgage insurance companies, providing PMI is a very profitable business indeed.

Mortgage insurance premiums are pooled each month, very much like car insurance. They are then paid out to lenders who suffer a loss because of a home foreclosure. The amount of your PMI payment is rolled into the monthly payment on your mortgage. But it also can be collected every year, and even included in the interest rate to effectively mask the payment you are making.

Many experts in the mortgage industry think that mortgage insurance lenders are making too large profits these days. Also, they believe that lender paid mortgage insurance is especially devious; the interest rate you pay on the loan is effectively hiding what mortgage insurance costs you. Some people do not even know they are paying for PMI at all.

However, others point out that mortgage insurance companies do provide a legitimate service to Americans and to the housing industry as a whole. Mortgage insurance companies provide stimulus to the US housing market by reducing the risk for lenders to lend mortgage funds at over 80% LTV. This part of the market would largely dry up if mortgage insurance companies were not there.

Mortgage insurance is especially costly for borrowers with lower credit scores and lower down payments. For example, FHA loans are available to borrowers with only a 580-credit score, with a mere 3.5% down payment possible. These borrowers represent a higher risk for lenders, so it makes sense that this mortgage insurance will be more expensive and the company’s profits higher.

Just as with any insurance, profits happen when revenues are higher than pay outs. This was the case during the housing boom. But when the crash occurred, many mortgage insurance companies took a major hit. These days as of 2018, foreclosures are down, and the economy is relatively strong. So, mortgage insurance company profits are higher.

How PMI Works on the Lending Side

When a homeowner cannot pay his mortgage, the home will usually go into foreclosure. This will usually occur once the borrower is at least 90 days behind. In some cases, the lender may take the deed to the home in lieu of foreclosure. But for most cases, the home will go to auction. Other parties can bid for the property, but banks will usually bid whatever is owed and buy the home. With a conventional loan, the bank will then list the home to be sold. If it cannot be sold for at least the principal remaining on the home, the mortgage insurance company pays the difference. For instance, if the mortgage balance is $183,000 and the property auctions for $160,000, the insurance company pays the bank the difference of $23,000.

The same thing occurs for most government guaranteed loans, such as FHA. For instance, say that a home owner makes a 3% down payment on a $200,000 house and defaults after three years. There is $190,000 of the loan left to be paid. FHA will pay the bank that gave the loan $190,000. In a few cases, FHA will assume the property and try to recover as much as it can when the property is sold.

The Bright Side of PMI

Most Americans unite in their hatred of PMI and the profits that mortgage insurance companies make. But data shows that over time, paying PMI each month can be a good investment for homeowners. Paying for PMI means you will probably buy a home years sooner than you otherwise would have. According to the house price index at FHFA, home prices have gone up 3.5% each year since 1991.

In recent times, home prices have been going up 5% per year or more in many markets. By paying for PMI each month, you are making payments toward your future wealth. Each time you make a payment on your home, you are paying off a small part of the equity. PMI plays an important role here because it allows you to start building equity faster.

Also, many home owners find that they are able to cancel PMI after five or seven years. At this point, they have paid enough on their home to reach 20% equity. Or, they have enjoyed enough home appreciation through market forces to reach 20% equity. For many of them, the home may have appreciated at least 5% per year for several years, giving them tens of thousands of dollars in equity, while they only paid $5,000 or $10,000 in PMI payments. This is a good return on investment.

So, if you are upset about PMI company profits, we hear you, but in some circumstances, paying for PMI is not really a bad thing.

 

 

References: https://patch.com/california/lajolla/bp–are-mortgage-insurance-companies-set-to-earn-huge-profits & https://www.housingwire.com/articles/41669-mortgage-insurance-companies-struggle-to-keep-up-in-third-quarter

 

How to Make Your Mortgage Great Again?  Homeowners Guide to Stop Paying PMI

Private mortgage insurance (PMI) helps home buyers move into a home without putting down at least 20%. Some financial experts think paying for PMI is ok if it means you can move into a home years sooner and stop paying rent. But others say that PMI is an unnecessary expense and should be avoided at all cost.

Let’s Start with Really Helping Homeowners Know their Rights to Prevent Unwarranted PMI Payments.

To make America great again, some argue we should try to avoid paying for PMI as much as possible. If millions of people stopped paying PMI today, they would have thousands of more dollars in their pockets every year. That money could be injected into the economy with more purchases. So, it is definitely a goal worth pursuing!

Steps to Take to Avoid PMI

The first choice is to come to the closing table with at least 20% down. If you have 20% equity in your property, you will not need to pay for pesky mortgage insurance.

Another option for military veterans is to get a VA loan. You do not ever need to pay PMI on a VA loan. This military mortgage is one of the most popular no-PMI loans in the market today.

If you cannot do either of those, there are some other options. Some lenders have lender paid mortgage insurance or LPMI. It is similar to PMI, but the lender pays the cost. This will involve paying a slightly higher rate for the life of the loan. To pay your PMI for you, the lender will require you to pay as much as .75% more on your interest rate.

Consider this option with caution; if you are staying in the home for 20 years, you will pay a higher rate for every year. This adds up to tens of thousands of dollars in additional interest.

Another possibility is to use piggyback financing. In this situation, the buyer brings a 10% down payment, and takes out an 80% mortgage and a 10% mortgage. This is known as an 80/10/10 loan.

How to Stop Paying PMI

Once you have a PMI payment, you want to get rid of it as soon as you can, so you can put that money to use for other things – making America great again, remember?

Generally, you can cancel your PMI once the principal balance drops to 80% of the value of the home. This can be the original appraised value or the current market value.

There are some restrictions, however. Depending upon the lender and the PMI provider, you could be asked to show a history of on time payments. Usually, you need to show at least a year of payments that were on time. Also, you should not have a second mortgage on the home.

Lenders have requirements to meet as well. They are required by the Homeowners Protection Act of 1998 to update you each year on how you can cancel PMI. Lenders are required by this law to terminate your PMI when you have 78% loan to value. You do have to be current on your mortgage when you get to 78% LTV to have PMI taken away. If you are not current, the PMI will be terminated on the first day of the first month you are current on the loan.

The Homeowners Protection Act of 1998 also states that you can request PMI cancellation after you get to 80% LTV based upon the original value of the home. But in this case, you need to contact the lender to have the PMI removed.

What Does PMI Costs?

PMI costs vary depending upon the level of risk you present to the lender. The smaller the down payment, the higher the PMI costs will be. Generally, PMI costs from .30% to 1.15% of the balance of the loan each year. The rate you have is based upon the credit score. Other factors are the percentage of down payment and the term of the loan.

PMI costs are usually monthly and are divided into 12 installments per year. This is added to the mortgage payment each month.

Note that the cost of PMI can change every year. This is based upon the mortgage insurance provider and state laws. So you can check with your lender to determine what your PMI costs will be for the next year.

If you are worried about the expense of PMI, just remember that it is helping you to own a home much faster than you would have otherwise been able to. Also, just focus on paying down on your mortgage so that you can get to 20% equity. Once you have gotten there, you can request PMI to be removed. And once you have PMI off of your monthly mortgage, you will have an extra $100 or $200 per month to use as you wish, so that you can help to make America great again!

 

American Homeowners Unite to Eradicate Unwarranted Mortgage Insurance Payments

Most Americans want to buy a home, but many people hate paying for private mortgage insurance. You are required to carry private mortgage insurance (PMI) on a home loan if you do not have the cash to make at least a 20% down payment on a home. PMI will cost you between .20% to 1.5% of the loan balance each year, depending upon your FICO score, loan term and down payment. This cost is divided into 12 monthly payments and is added to your mortgage each month.

PMI monthly payments can easily add up to $1,500, $2,000 or more per year. That is the reason that many Americans want to eradicate mortgage insurance as much as possible. If you want to get rid of your PMI payment or avoid it entirely, keep reading and learn how.

Who Needs PMI?

Lenders know that a borrower who puts down a lot of money on a home is much less likely to default. It has been found that people who put down at least 20% down on a home are statistically much less likely to be foreclosed eventually. Many first-time home buyers do not have equity in a property to rely on for a down payment and cannot easily come up with 20% down. So, it is necessary for them to pay for PMI. It is estimated that as many as 50% of home buyers today have mortgages with PMI. Most of these loans were made by people who put down between 5% of 15%.

How Do I Avoid PMI?

The best way to avoid paying for mortgage insurance is to save enough money to put down 20%. This may require you to set your sights lower on your new home and buy something smaller and simpler in a more affordable neighborhood.

Another option is to ask a relative or close friend for a financial gift to help you make the 20% down payment. Many mortgage companies will allow you to receive a financial gift to make your down payment. The only requirement generally is a letter from the person stating that it is a gift, not a loan.

Still another alternative is to opt for lender paid mortgage insurance, or LPMI. This means the lender will pay for your PMI, in exchange for a slightly higher interest rate. The only caution here is if you intend to live in the home for many years: You will pay a higher interest rate for every year of that loan, which can amount to tens of thousands of dollars in extra interest payments. LPMI is a better deal if you plan to sell the home within a few years.

Also, if you are a military vet or active military, you may be eligible for a VA loan. These loans are very affordable with low interest rates, and no PMI is required. Many people can even get 100% financing.

How Do I Get Rid of PMI?

So, what to do if you already are paying for mortgage insurance? You have several options. First, continue to make mortgage payments until you have at least 20% equity in the property. You can review your loan’s amortization schedule to determine when you have this amount of equity. You also may hit 20% equity if the home has appreciated significantly since you purchased it. You may need to pay for an appraisal to show your lender that you have 20% equity and PMI should be cancelled.

When you achieve 20% equity, you should request PMI be cancelled in writing with your lender. It is necessary to have made on time payments in recent months to have PMI cancelled. Also, lenders are required by federal law to cancel PMI when you have 78% loan to value, or 22% equity. This should be done automatically.

If you have an FHA loan, you may have to pay for mortgage insurance for life, due to recent FHA regulatory chances. Your only option in this case is to refinance into a conventional mortgage when you reach 20% equity.

Legislative Update on PMI

The Consumer Financial Protection Bureau or CFPB has been providing recent updates and information about cancelling PMI for homeowners. According to the CFPB director, it is not unusual for mortgage companies to try to bill borrowers for unnecessary PMI payments. CFPB has stated that it is monitoring mortgage servicers to ensure that no consumer is being billed unnecessarily for mortgage insurance.

The takeaway on mortgage insurance is that it helps millions of people buy a home much faster. So that is a good thing. But it comes at a considerable cost, so you are wise to try to eliminate PMI as soon as you can. Americans can disagree on many things but trying to get rid of PMI is definitely something most of us can agree on!