remove pmi

Easy Steps to Make Your Monthly PMI Payment Disappear

Did you buy a home with less than a 20% down payment? Then you probably are familiar with private mortgage insurance, or PMI (if you have an FHA loan, you know it by mortgage insurance premium or MIP). Mortgage insurance is usually required on loans with less than a 20% down payment.

It is necessary because lenders will not take on the risk of lending that much money with a low-down payment unless they are assured they will be reimbursed if you default. Mortgage insurance reimburses the lender if you stop making your mortgage payments. PMI is an annoying extra cost each month on top of your mortgage, and it is great to get rid of it if you can.

Below are ways to eliminate PMI or MIP that you can try.

PMI Removal Steps

To get rid of your monthly PMI payment, you are required to have at least 20% equity in your home with a conventional mortgage backed by Fannie Mae or Freddie Mac. You can write a letter to the mortgage lender when you have reached 20% equity and ask them to remove your mortgage insurance. This may be possible when you have paid down your mortgage balance to 80% of the original appraised value of the home.

Also, in these times of rising property values in 2018, it is possible that appreciation could cause you to reach 20% equity faster than just through paying your mortgage on time. You may want to order a new appraisal on the property if you think that your home value has gone up significantly. You can get an idea by looking at the sold prices in the past year for similar homes in your neighborhood. Also, if your property tax assessment went up substantially in the past year or two, you may have reached 20% equity faster than you thought.

When you write a letter to your conventional mortgage lender, you will need to ask them to remove the PMI payment because you believe you have reached 20% equity. You will need to provide proof that the home value supports your request, such as with a recent appraisal report. Or, you can refer to your original amortization schedule to show that you have paid down the mortgage so that you have 20% equity.

The mortgage lender generally will drop the PMI requirement when you reach 20% equity and make a written request. But do not assume they will do so automatically! Some lenders will drag their feet and hope you continue to make PMI payments after you reach 20% equity. However, recent federal law changes do require conventional lenders to drop your PMI requirement when your loan balance has reached 78%. To get the payment dropped, you will need to have made your mortgage payments on time for at least the past year.

MIP Removal Steps

Unfortunately, if you have an FHA lien that was underwritten after early June 2013, your mortgage insurance requirement is for the life of the loan, UNLESS you made at least a 10% down payment. In this case, you can have your mortgage insurance cancelled after 11 years. This is a recent change to FHA rules that was enacted because the emergency fund for FHA to tap in case of mortgage defaults had gotten below the legislatively mandated minimum amount, so the MIP requirement was made permanent for most borrowers.

If you think it sounds unfair to be paying mortgage insurance when you have 50% equity, we agree with you. Who is going to default on a mortgage when they have possibly hundreds of thousands of dollars of equity in their home? Virtually no one.

So, if you have an FHA mortgage and have above 20% equity, it is highly recommended that you refinance your FHA loan and move into a conventional loan. But you need to have a good enough credit score to do so. Plus, if you have an FHA loan that was approved in 2016 or 2017 for example, you are probably enjoying a much lower interest rate than you can get in 2018 or beyond. You will need to run the numbers to determine if you can save more money by cancelling PMI and moving into a possibly higher interest rate with a refinance into a conventional loan.

Whether you have a conventional or FHA-insured loan, you can speed up your ability to cancel mortgage insurance by prepaying on your loan; even an extra $50 per month will mean a serious drop in your balance over the years. Also, consider remodeling, which can add substantial value to your home. Then ask your lender to recalculate your loan to value to see if you have gotten to the magic 20% equity mark.

 

References: https://www.foxbusiness.com/features/how-to-dump-pmi-asap

interest only mortgage

Why Is It Difficult to Qualify for an Interest Only Mortgage?

If you are looking for a less expensive mortgage payment, one way is to strip it all the way down to just interest. That is what the interest only mortgage is. This type of mortgage requires you to only pay on the interest on the loan, which is simply the cost of the money you borrowed. You are not paying back the principal. These types of loans are harder to get and not as common as before the housing crash of a decade ago. Below is more information about no interest loans and how to get one.

Find Out Why So Many Borrowers Are Choosing the Interest Only Mortgage Option in 2018

Interest only home loans are usually set up as an adjustable rate mortgage and usually has a term up to 10 years. After this point, you are required to make amortized payments that include interest rate charges and principal. The other options are to pay off the loan in full or to refinance.

For instance, say you get an interest only mortgage for $500,000 with a 5% rate for five years. The interest only payment is $2083. After five years, the rate is adjustable on an annual basis, but it is still an interest only loan. Now let’s say the rate goes up to 6%. The interest only payment will be $2500.

If the rate continues to rise, and by the end of year 10 you must make interest and principal payments, you could eventually be paying 7% interest and have a payment of $3,876.

At the conclusion of the interest only term, the above example is 10 years, you may be able to refinance your loan balance into a new loan if a better interest rate is out there. But the problem with this is it is impossible to predict what rates will be with any certainty in several years. Even trying to guess what they will be in several months is difficult.

Qualifying for an Interest Only Mortgage

The reason that interest only loans are more unusual today is they are more difficult to qualify for. You typically need a higher down payment, a lower debt to income ratio and a good credit score. It would be rare that you could get an interest only loan with a FICO score under 700. You will certainly have to show the lender that you have solid financial assets and the ability to pay the loan.

Who Gets Interest Only Mortgages?

It depends, but many Interest Only Loans are for people who will probably not stay in the home for a long time. Most of these home owners are thinking of staying in the home for five or 10 years. The best borrowers for interest only loans have a lot of cash in the bank and a strong financial position. The fact that their loan is not reducing the principal is not a risk for them.

Some of the common types of interest only mortgage borrowers are those with:

  • A lot of monthly cash flow
  • A rising income
  • A lot of cash in the bank
  • Income that varies each month

Interest only mortgages can be a good choice for people who have the financial discipline to make a principal payment periodically. This can also work for the worker who is in a job that pays annual bonuses each year that can be used to pay down the loan principal every year.

Another type of person who might use an interest only loan is a couple getting close to retirement who could use an interest only loan to purchase a second home. They might sell their first home when they retire, move to their second home and then pay off the loan in full.

But keep in mind that interest only mortgages are not usually a good choice for the first time or conventional long-term buyer. Getting these loans is harder than it used to be because the loans are not purchased by Fannie and Freddie, so they are much harder to qualify for. Lenders must hold them on their own books or sell them to private investors.

An interest only loan can be a good fit for a higher income borrower with assets, but it is probably not appropriate for the first-time home buyer and is quite difficult to qualify for anyway.

 

 

 

2018 Tax Deduction Changes for Home Buyers and Homeowners – Is Buying a House Still Worth It?

The summer home buying season in 2018 is in full swing, with rising prices and interest rates encouraging many buyers to get the deal done before the cost of buying a home rises even further.

But the landscape for buying a home from a tax deduction standpoint has changed a good deal since last year. Congress has reduced some of the tax incentives to buy and keep a home of your own. But don’t worry: For many Americans, it is still better to buy a home than rent over the long haul.

You Should Know What Home Buyer Tax Deductions Are Available to You Before You Purchase a House.

The new tax laws passed by Congress have doubled the standard deduction to $24,000 for married couples, and has capped state and local tax deductions to $10,000. These changes will limit the tax deduction incentives to buy a home rather than renting. Zillow has estimated that homeowners who are taking tax deductions and listing mortgage interest as a deduction will drop from 44% to 14%. You also cannot write off the interest on many home equity loans and lines of credit today, unless you are using it for home improvements. Further, you only can deduct mortgage interest on debt on a home from $750,000 and below.

These changes in tax laws have reduced the tax advantages of buying a home, but evidence continues to suggest that buying generally beats renting.

Economists believe the tax law changes will reduce the number of purchase offers enough to drop home prices by approximately 4% in some of the more expensive cities, but the data does not show this yet.

Mortgage Interest Tax Deductions

Learn How to Maximize Mortgage Interest Tax Deductions

Tax law changes were laid out in December 2017, and we currently have resale pricing data available through February 2018. In the top 20 cities of the country, year over year price hikes were about the same or even higher than a year ago. This was especially the case in more expensive markets such as San Francisco, Los Angeles, San Diego and New York City.

The majority of home buyers have more disposable income to make their mortgage payments. In their weekly take home pay, a higher standard deduction provides them compensation for not taking property tax and interest deductions. And lower rates overall will actually increase the buying power of many taxpayers.

In hotter markets such as New York City, foreign buyers who often come in and pay cash to park wealth in the US, have played a major part in hiking prices. US personal income tax laws have little to do with this.

In June 2018, the Freddie Mac average for a fixed rate, 30-year mortgage is about 4.7%, which is up from the 4% range a year ago. For a $300k mortgage, this will add about $150 per month to your payments. But keep in mind that landlords are paying more to get loans for their apartment buildings and that affects rents.

How long you plan to stay in your home will also affect whether you want to buy or rent, regardless of the tax law changes. Closing costs, realtor fees and so forth raise the cost of owning a home, even if you can roll the costs into the mortgage.

For example, if you were to buy a home with a 30-year mortgage, 4.6% interest rate and a 20% down payment, if you occupied the home for at least four years, owning would still beat renting even if you cannot take the mortgage interest deduction anymore.

Families might decide to continue to rent and invest the down payment in stocks. From 2000 to 2017, equities measured by the Standard and Poor’s Index were up an average of 5.3% per year. But appreciation in homes in the top 20 markets in the last several years have shown approximately 6% increases each year.

There is also tougher zoning around major cities where the big employers are, and rising costs of materials and slower home building is making single family housing stock lower than in past times. As more young buyers are starting to get into the market, it is a good bet that continued home appreciation with continue to beat the stock market average. This is another argument for buying a home over renting, even without the previous tax incentives as enticing. Homeowners also have their fully equity working for them and not just the down payment.

While it is true you are not able to write off as many expenses as before as a home owner, there are still major advantages to buying over renting, especially in a growing economy with rising home prices and interest rates, and higher demand for homes. It is expected that home prices and rates will continue to rise, making home owners somewhat sitting in the cat bird’s seat, especially if they bought several years ago when rates and prices where much lower.

 

 

 

References: https://www.marketwatch.com/story/even-with-mortgage-rates-up-buying-instead-of-renting-makes-sense-for-many-2018-05-29 and https://www.whitehouse.gov/sites/whitehouse.gov/files/images/Effects%20of%20Changes%20to%20the%20Mortgage%20Interest%20Deduction%20FINAL.pdf

 

appraisal waiver

Can You Get Fannie Mae or Freddie Mac to Waive the Appraisal Requirement on Your Refinance Mortgage?

If you are buying a home or refinancing your existing mortgage, you know that the appraisal process can sometimes lead to complications.

Fannie Mae and Freddie Mac seem to be so confident in the housing market that they are willing to waive some of the appraisal requirements. Is this true? Let’s dive into it.

First of all, the process of ordering the appraisal can be time consuming. By the time the appraiser comes, does the appraisal and produces the report, several weeks may have passed. For people who need to get their refinance done quickly to get money for this or that, or to enjoy that lower rate, this can be a problem.

fannie freddie appraisalThe good news for some of you is that if you have a Fannie Mae or Freddie Mac mortgage, you may be able to have the appraisal requirement waived in some cases for a purchase or refinance.

Freddie Mac began their program in the summer of 2017, and Fannie Mae started to offer some appraisal free mortgages at the beginning of 2017. However, not every property will qualify.

Some of the typical requirements to get an appraisal free purchase or refinance mortgage include the property having an 80% or less loan to value ratio; being a single family or condo property; primary occupancy, and only when Fannie or Freddie have a previous appraisal in electronic format that has been analyzed by an underwriter.

It is not expected that more than 5% of loans will be able to qualify for the Fannie and Freddie programs, but it is possible that the programs could be expanded to more borrowers later.

As you might expect, mortgage lenders are generally happy about the moves to offer some purchase and refinance loans without an appraisal. They say that leveraging modern technology to get a property valuation without an appraisal will provide many customers with more certainty about the status of their mortgage application at the beginning of the process. There is nothing worse than expecting to be able to refinance and to make financial plans, and then have the appraisal come in low and scuttle the deal.

On the other side, most appraisers are not happy about mortgage that may require no appraisal. Appraisers always argue that they have a continuing role in the mortgage process. They say there is no way that technology can substitute what they are bringing to the table, which is eyes, ears and noses and the expert ability to analyze a home, its neighborhood and market conditions and arrive at a precise value for the property. Computer programs have a lot of data, they say, but they do not know what improvements and damages have been done to a house that affect value.

According to one appraiser in Virginia, it is not unusual to walk into a five-year old home that is in such rough shape you would think it had not been maintained for 25 years. Another appraiser in Oklahoma says that the path that Fannie and Freddie are on is risky. The databases that the mortgage giants are relying on may have a lot of information about previous appraisals, but if new appraisals are not being done regularly, that property data will lose its accuracy over time.

Remember, if you want to try to qualify to have your appraisal requirement waived, you need to have a Fannie Mae or Freddie Mac mortgage with a loan to value ratio of no more than 80% if the purpose is to lower the rate. You also will need to have a 70% loan to value to get cash with a refinance.

The bottom line on this subject is that the ability to refinance or buy a home without an appraisal will probably only affect a small number of people. But you should be sure to talk to your mortgage lender to see if you can qualify. If so, you can save yourself a lot of time and at least $400.

 

 

References: https://www.washingtonpost.com/realestate/for-fannie-and-freddie-appraisals-are-not-always-necessary/2017/06/19/18032bfc-54fc-11e7-ba90-f5875b7d1876_story.html?utm_term=.d8ccf5204c28

 

FHA Wants You to Make you Pay Mortgage Insurance for Life.  What Can You Do about It?

FHA mortgages, backed by the Federal Housing Administration, are an excellent loan product for many Americans who have lower incomes and/or credit scores. But the FHA mortgage comes with one major downside: mortgage insurance.

FHA mortgage insurance or MIP is a special type of insurance policy that protects your lender if you default on your mortgage. This insurance allows the lender to issue credit to people with lower credit scores, higher debt to income ratios and lower incomes. FHA MIP reduces the risk for the lender, and you enjoy the benefits, which is namely having a mortgage with a low interest rate and down payment.

FHA MIP is paid for up front and each month. You need to pay an upfront premium of 1.75% of the loan amount, which is normally wrapped into the loan. In addition, you pay an annual premium that is part of your monthly mortgage payments. Depending upon the size and term of the loan, the expense is .45% to 1.05% of the amount of the loan.

The major downside with MIP is for most current loan holders with loans issued after June 2013, you must pay the insurance for the life of the loan. The only exception here is if you put down 10% or more on the loan. In this case, you can cancel the insurance after 11 years.

If you have an FHA loan and you want to get out of mortgage insurance, you really have only one major option, assuming you put down less than 10%: You need to refinance when you can out of the FHA loan into a conventional loan. When you have at least 20% equity in the home, that is when you should think about getting out of the FHA mortgage and going to a conventional loan.

Once you have 20% equity, you can usually get out of paying mortgage insurance on a conventional mortgage. You will need to show a solid payment history when you want to refinance, however. Many people are enjoying impressive gains in home values in 2018, with the average home value increase more than 6% across the US, and much higher in many markets. In San Antonio TX, for example, homes have increased 10% in value in the past year alone. This could provide a way for some people to refinance into a conventional loan with at least 20% equity.

But what if you got an FHA mortgage when rates were lower and now want to refinance when rates are higher? These days, rates are around 4.5% and even higher in some cases. In this situation, you may need to delay a refinance until rates have lowered.

If you think you cannot refinance right now, you may have another hope though. The commissioner for FHA has wide latitude to alter the premium structure on FHA loans and has done so several times in the past decade. It could be that the policy will change in the future so that you can cancel MIP sooner.

More About FHA Loans

Many Americans rely on FHA loans to buy their home because the terms for getting these loans are so good. FHA loans can be obtained with just a 580-fico score and a 3.5% down payment for many borrowers. This is one of the lowest down payment and most flexible mortgage programs in the country. Millions of Americans have been able to get a home loan much sooner by taking advantage of the FHA program.

Of course, the MIP requirement is a major annoyance for many borrowers. It seems hard to believe that you should have to pay $100 or $200 per month for mortgage insurance, especially for the entire life of the loan! But home owners should remember that getting an FHA loan probably allowed you to stop renting much sooner than if you had waited to qualify for a conventional loan.

The bottom line with FHA loans and MIP is that mortgage insurance is expensive, but it provides a way for people with lower credit scores and mediocre income to get a home loan much faster than they otherwise would. After you get an FHA loan and are approaching 20% equity, try to get your credit higher so you can refinance into a conventional loan. This is the best way to go for people who want to reduce their loan costs going forward.

Should You Refinance Your Mortgage without PMI?

For many home buyers PMI (private mortgage insurance) is one of those necessary evils of life. If you lack 20% down for a down payment, you usually need to pay PMI. But for many home owners, you are not usually stuck with paying for mortgage insurance forever. If you have equity in your home and have a conventional mortgage, you could be able to refinance and stop paying for PMI. But is it smart to do so?

Below is an overview of whether or not you should refinance your mortgage to lose PMI.

PMI Overview

Private mortgage insurance is a monthly premium paid in addition to your monthly mortgage payment. It is necessary to pay this extra cost in most cases when you put less than 20% down on a home. The private mortgage insurance will pay back the lender if you were to stop making mortgage payments.

PMI costs depend upon the size of the loan, your credit score, payment history, type of loan, and other factors. For a $200,000 loan, people commonly pay between $150 and $200 per month for PMI. It is a considerable extra expense, which is why many people want to refinance to lose this extra payment.

Before You Get a Home Refinance for No PMI

But before you think about refinancing, you should figure out if you are even eligible for having PMI cancelled. In some situations, you could have it cancelled without refinancing at all.

On a conventional loan, federal law requires that PMI drop off automatically once the home owner has reached 78% LTV based upon the value of the home at the time the property was insured. If you are getting close to 22% equity, it might be logical to wait until the lender cancels your payments on their own.

These days, many home owners find that with home prices increasing, they are eligible for PMI cancellation sooner than they realized. In 2017, home appreciation was more than 6% on average in the US. Homeowners in some cities are finding that their home values may have soared 10% or even more.

If the value of the property has appreciated considerably since you got your mortgage, the lender may be willing to allow for this and cancel your PMI. Many mortgage lenders on conventional loans will let borrowers cancel PMI when the value is 80% through amortization and appreciation.

Home owners who are confident that their home value has risen or are near reaching 20% equity through their payments, it is necessary to get a new appraisal, which will run $300 to $500. If you do not want to spend that money, consider an automated valuation model online. While it is no substitute for an appraisal, it will give you a reasonable idea what the home can appraise for.

FHA Loan Prior to MI Changes

But for people who have an FHA loan, note that for the most part, these loans require you to continue paying for mortgage insurance even after you have reached 22% equity, unless you put down 10% or more when you bought the home. In the past in this situation, you could cancel your mortgage insurance on an FHA loan after 11 years, but FHA changed their rules recently. If you closed your FHA loan prior to these changes then you are grand-fathered in for the MI elimination.

That is a big reason why you may want to think about refinancing, with an FHA loan, if you have good credit and you are confident you have at least 20% equity. There is little reason to continue to pay for mortgage insurance with an FHA loan for years and years when you have more than 20% equity.

One consideration however would be if you have a very low interest rate below 4%. As of mid-year 2018, interest rates have reached record highs for the past six to seven years. While still historically low at 4.6% or so, people who have rates under 4% from a year or two ago would need to think long and hard if it is financially worth it to refinance a loan with such a bargain basement rate.

While the only way to get out of FHA mortgage insurance these days for most people putting down less than 10% is to refinance, it may not be a financially wise move.

Should You Refinance?

If you cannot get automatic PMI cancellation through making payments or through appreciation, you need to weigh if the cost of refinancing is worth more than what you will save with not paying for mortgage insurance. A good way to get a rough idea of these numbers is to simply divide what the loan costs by what the monthly reduction will be in your payment.

For those who do decide to refinance to get rid of the mortgage insurance, you should ensure you are getting a new loan with low fees, and not just one with the lowest interest rate.

 

 

References: Understanding No PMI Mortgage Options

fha pmi

FHA Homeowners Need to Do This, to Get Rid of PMI

FHA mortgage insurance, known as MIP, is an insurance policy that protects the lender if the loan holder defaults on the mortgage. The MIP policy allows the lender to issue FHA backed loans that require a smaller down payment. FHA MIP lowers the risk for the lender, and the benefits are given to the borrower.

The home-buyer pays for MIP both up front and every month. Borrowers with loans that were issued after June 1, 2013 must pay mortgage insurance for the entire life of the loan, with a few exceptions. If you put down 10% or more on the loan, you can cancel the MIP after 11 years. If your loan was closed before June 1, 2013, you can cancel the MIP once you have 20% equity in the home.

Are You Looking to Get Rid of Paying Mortgage Insurance on Your FHA Loan?

Another option to get out of paying mortgage insurance if you have a loan issued after June 1, 2013 is to simply refinance the loan into a conventional mortgage when you have reached 20% or more equity in the home. Note that getting approved for a conventional loan requires a higher credit score than with an FHA loan. So, make sure your credit is in good shape if you want to refinance into a conventional loan. There is no prepayment penalty on an FHA loan program, so you can refinance at any time.

Refinancing into a conventional loan could occur sooner than you think; property values have gone up markedly in the past three years. You may want to check property values in your area and even pay for an appraisal to see how much your home could sell for. There are some parts of the country that are seeing yearly property value increases of 10% or more. According to the National Association of Realtors, the median home listed for sale in Q2 of 2017 was $255,000. This was more than 6% above a year earlier. This is happening across the country.

But one issue you could run into is the interest rates for a refinance into a conventional loan could be higher than what you are paying now. Rates in 2018 are on the rise, with conventional rates in the 4.5% and 4.6% range. This is nearly a point higher than a year ago. If your rate is at 4% or lower, you might need to wait to refinance to get rid of your mortgage insurance payment.

Cancelling Mortgage Insurance with a Conventional Mortgage

You have more options to get rid of PMI with a conventional mortgage. PMI is the name of mortgage insurance for conventional loans. Once you reach 20% equity in the home with a conventional mortgage, your PMI should be dropped off the loan. You should write a letter to your lender to request the insurance policy be cancelled. Not every lender will automatically cancel the mortgage insurance, you may need to contact them in writing. But federal law states the conventional lender must drop your PMI once you have 22% equity. Still, it is the smart home owner who keeps on top of this matter; it is not unusual for a lender to continue to accept PMI payments beyond the point which you are required to pay them.

But keep in mind that most lenders will base the 22% equity/78% LTV on the last appraised value. If your property has shot up in value, you should contact your loan servicer to determine what the requirements are to get an early cancellation. The loan servicer usually will require a new appraisal. This will cost you approximately $400, so you should check home values in your area to see if your home will really appraise enough to cancel PMI early. You can check with your realtor who should be happy to run comps for you for your neighborhood. This is one of the main reasons that LPMI loans are in high demand in 2018.

The bottom line is that mortgage insurance is often a necessary evil for many home buyers. If you do not have the cash to make a 20% down payment, you will need to get mortgage insurance, unless you get a VA loan.

Many home buyers with previous credit problems may need to get FHA financing because these loans are easier to get with lower credit scores. Even though you could get locked into paying MIP longer than you like, sometimes for the life of the loan, this may be the best option for people with lower credit scores. But once you have 20% equity and you have good enough credit to refinance, you should get into a conventional mortgage if the rates are low enough to make the move make sense.

 

 

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

lender paid mortgage insurance

The Truth About Lender Paid Mortgage Loans and Why the Big Banks Don’t Want You to Get LPMI

Home buyers who cannot put 20% down on a home will probably need to pay for mortgage insurance. But there are different ways to get around this extra expense. Lender paid mortgage loans is a relatively new concept to home buyers but it’s popularity is soaring. Below is more information about how to do this.

Overview of Mortgage Insurance

Mortgage insurance is required on loans without at least 20% down because the home owner is more likely to default on such a loan. The monthly mortgage insurance payment ensures that the lender will be reimbursed if the home owner stops paying. This is an extra expense of $100 to $200 per month in many cases.

Some mortgage companies offer lender paid mortgage insurance or LPMI. This is mortgage insurance that the lender pays for you. But there is a catch: You need to pay a slightly bigger interest rate to make up for not paying that pesky mortgage insurance. Lender paid mortgage insurance typically gives you a .5% higher interest rate, which can add up to a lot of extra interest over the years. The LPMI option is a very popular choice for borrowers seeking a no PMI mortgage loan.

Why Consider Lender Paid Mortgage Insurance?

People may want to get LPMI because of the lower monthly payments. With a home loan with LPMI, you do not have to pay for mortgage insurance each month. Your monthly mortgage costs will usually be lower. If you have a loan for $200,000, you could save up to $60 per month with LPMI.

Second, having an LPMI home loan means you do not need a 20% down payment. Your upfront buying costs tend to be lower. If you put down 5% or less for an lender paid mortgage insurance loan, you may save thousands of dollars at the closing table on a $200,000 loan.

LPMI can make sense for higher income borrowers who can get a higher tax deduction due to the higher rate of interest. People with a lower income could be able to deduct regular PMI, so LPMI will not give you additional benefits when it comes time to file your taxes. In most cases PMI is tax deductible, so this has to be factored into a side by side comparison.

Why Would You Not Get Lender Paid Mortgage Insurance?

LPMI will always come with a higher interest rate. You will pay a bit more interest over the life of your mortgage by not paying for mortgage insurance upfront. This can add up over the life of your loan if you plan to stay there for many years. If you intend to sell your home in five to seven years, this is not as important.

Some experts say if you put down 5% or less and you are going to stay in the home for less than a decade, LPMI may make sense for you. But people who want to stay in the home for a long time will pay more over the years.

Second, mortgage interest rates are climbing. As of May 2018, mortgage rates are in the 4.5% range and they are trending higher. This means your LPMI mortgage will cost more. Be sure your mortgage lender walks you through the costs of doing LPMI as opposed to a conventional loan. Be sure you are getting a deal that works best for you in your circumstances.

Third, LPMI plays a major factor in the rate of interest you get. The lower your score, the higher the interest rate will be. LPMI can be particularly expensive for people with a credit score below 700. But if you want, you can buy down your interest rate by paying points.

If you have a high LTV near 80%, you may not want to get LPMI. You are nearly done with mortgage insurance anyway.

Other Options

There are other types of loans that have a smaller down payment. One of the most popular is the mortgage backed by FHA. It only requires you to put down 3.5% for many buyers. In some cases, these loans may have a lower interest rate than LPMI. Note however: You will need to pay for mortgage insurance throughout the life of the loan. Compare FHA to lender paid mortgage insurance options.

In a conventional mortgage, the lender requires you to pay for mortgage insurance until your loan balance is below 78% of the value of the home originally. There are some ways you can speed up this process by making more mortgage payments than you are required to. It is a good idea to speak with your lender about what your short and long term financial goals are and what type of mortgage product would be the best choice for you.

The bottom line on LPMI is it can be a good idea for borrowers who will stay in the home longer, primarily. Some banks do not want you issue LPMI because it is an extra cost for the bank up front. While it is off set by the higher interest rate, for some banks, they prefer to charge buyers PMI.

FHA Homeowners Who Purchased a House after June 1, 2013.   Here is the Bad News.

Many home buyers with past credit problems and lower down payments turn to the Federal Housing Administration or FHA to help them get a mortgage. FHA mortgages are not issued by FHA; they are underwritten by FHA approved lenders who have more credit and income flexibility in their underwriting standards so people who may not otherwise be able to get a home loan can get one. It is possible for a borrower with a 600-credit score and a 3.5% down payment to be approved for an FHA mortgage in some situations. And the borrower can often get that loan at a rate below conventional rates. What a deal!

But as with almost everything in life, nothing is for free. With FHA mortgages, you must pay for mortgage insurance at closing and annually. This is referred to as MIP. FHA assesses a 1.75% upfront mortgage premium when the loan closes. Then, it charges the buyer a varying rate each year; most common it is 1.35% of the loan value. The borrower pays that premium each month as part of their mortgage payment.

FHA loan holders are not the only ones who must pay mortgage insurance. On conventional mortgages that are supported by Fannie Mae and Freddie Mac, you must pay PMI or mortgage insurance when you have less than a 20% down payment. Once you have reached 20% equity through mortgage payments, appreciation or a combination, you can have PMI removed.

June 1, 2013

It used to be that you could do the same thing with FHA loans. In 2013, it was determined that the FHA’s Mutual Mortgage Insurance Fund or MMI was short of money. This fund is used to pay default claims when buyers cannot pay their loans anymore. Federal law dictates there must be a minimum amount of funds in MMI – $2 for every $100 that is insured by FHA. As of an audit in 2013, FHA had -$1.44 for every dollar it insured.

That is why FHA had to change its rules. In the past, FHA required homeowners to pay MIP as long as their loan to value was more than 78%, where the value assumed was whatever the last known value was, such as at loan closing. Also, if the loan term was more than 15 years, at least 60 payments had to be made before FHA could cancel MIP.

But as of June 1, 2013, this changed. All loans closed on that date and afterwards that had a down payment of 10% or more could only have MIP cancelled after 11 years. Loans that have less than a 10% down payment must pay MIP for the entire term.

This means if you buy a home with an FHA loan with 3.5% down, you must pay for MIP for all 15 or 30 years of the loan term. This may seem very unfair, especially for people who have far more than 20% equity in their property after years in the home. But this is the price you pay for getting approved for a loan through FHA.

Of course, FHA rules change often. It is possible this rule could be changed in the future, but as of today, MIP is forever if you put down less than 10%.

Other Options

The silver lining to this unfortunate situation is that if you have a better credit situation and are paying your loan on time, you do not need to keep your FHA loan forever. If the interest rate environment gets to a point where you can refinance at the same or even a lower rate into a conventional loan, you may be able to do so without paying mortgage insurance.

With a conventional loan and at least a 20% down payment, you can get a loan without any mortgage insurance. You will simply need to make sure you have suitable credit to be approved for a conventional loan. Lending standards for conventional loans are stricter than FHA. You will generally need a credit score of 640 to be considered and will have to pay a higher rate at that FICO score. The best conventional rates go to those who have well over a 700 FICO score.

The bottom line with FHA loans is this is a great program for people with average or even poor credit. Some people with past bankruptcies or foreclosures will have difficulty being approved for a conventional loan. FHA is often the last resort, and it really is a good deal. MIP is the only major problem though. Just keep in mind that you need to get your credit score and payment history in order if you ever want to refinance the FHA loan so you do not need to pay mortgage insurance after you achieve 20% equity.

 

 

 

 

maxine waters

5 Reasons Why Maxine Waters is Right About FHA and Mortgage Insurance

Perhaps the current FHA requirement for mortgage insurance (MIP) for the life of most FHA loans could be a thing of the past, if Rep. Maxine Waters has her way. The California Democrat recently proposed a bill in the House of Representatives that would repeal the life of loan standard for FHA mortgage insurance. It would reinstate the past policy of requiring loan holders to pay until the principal balance is 78% of the original loan value. That is the standard currently for conventional loans.

FHA changed the policy in 2013 as an effort to improve the financial health of the Mutual Mortgage Insurance Fund that is the flagship fund for FHA. The Federal Housing Administration needed a nearly $2 billion bailout in 2013 because of a shortfall in that fund. Since that time, the fund has seen four straight years of growth and exceeded its mandated financial target set by Congress for the last two years.

Now that the MMI Fund is on better financial footing, Waters wants to eliminate the policy to keep mortgage insurance for the life of the loan.

Cutting this policy, which requires FHA mortgage holders to keep mortgage insurance for the entire loan life, is a big change that many in the housing and mortgage business have wanted for years. Waters stated that families that choose FHA financing should not be required to have expensive mortgage premiums for the life of their FHA loan. The bill would remove this requirement and would make FHA mortgages more affordable for many American families.

The president of the National Association of Realtors, William Brown, agrees with Waters’ assessment. He stated in late 2017 that lower income Americans often want to get an FHA mortgage, but policies such as life of the loan MIP make it more difficult for borrowers to afford the loan. He also said that mortgage insurance for life encourages people with a lot of equity to refinance to a conventional loan after they have 20% equity in their homes. This is a missed opportunity to boost the strength of the FHA program.

We support the bill that Waters has sponsored and hope it is passed soon so people can cancel their MIP once they have 20% equity in their home.

Below are some of the reasons we support Maxine Waters on this mortgage bill:

#1 Cost of MIP

Private mortgage insurance is expensive, and FHA loan holders are among those least able to afford it. MIP can cost as much as 1% of the loan amount on a yearly basis. This means for a $100,000 loan, you could pay $1000 per year, which is $83 per month. It can easily be $200 per month for many homes in the US in the $200,000 range. Two hundred dollars per month is a lot of money for people with a lower income!

#2 May Not Be Tax Deductible

As of 2017, PMI and MIP were tax deductible, but this is only true if the adjusted gross income for the borrower is under $109,000. This means that many families with two incomes will be left out. The ability to deduct mortgage insurance costs from your taxes is due to a special tax law that has been extended every year for years. But it is unknown if this will continue.

#3 Heirs Get Zero

When most homeowners hear about insurance, they think that their family will get something if they die. This is not true with mortgage insurance. The mortgage company is the only beneficiary if you die. The proceeds will be paid to the lender. If you want to protect your family so they have money if you die, you have to have a life insurance policy. Do not think that your mortgage insurance will help anyone other than the lender.

#4 Throwing Money Away

Paying mortgage insurance for the entire life of the loan is crazy. If you were able to take that money and invest it into a mutual fund with deferred tax obligations, such as in an IRA, you easily could have hundreds of thousands of dollars after 20 years.

#5 Cannot Be Cancelled

It is simply unfair that MIP on FHA loans cannot be cancelled at all, but you can do so if you are paying PMI on a conventional loan. This is essentially discriminatory against people with lower incomes who get an FHA loan.

The only way that you can ever cancel MIP on an FHA loan for loans issues after mid 2013 is to put down 10% or more. In those cases, you can cancel your loan after you have paid on time for 11 years. So even when you put down well more than the minimum of 3.5%, you can only cancel after 11 years!

Maxine Waters in the News

In April, Rep. Maxine Waters introduced a bill aimed at reducing the burdens of homeowners that have FHA mortgage insurance. The GOP in Congress and the Trump Admin did not take up her bill, but this was another example, of Waters once again fighting for American homeowners.

On Monday, June 18, 2018, Rep. Maxine Waters introduced a bill to increase homeowner protections to prevent foreclosure. She is the ranking Democrat on the House Financial Services Committee, and Waters has made reforming the FHA and FHFA a few of her missions.

Maxine Waters said in a statement “Despite the lessons learned during the foreclosure crisis, we continue to uncover evidence of bad behavior by our nation’s mortgage servicers.” She continued, “Borrowers can’t choose their servicer so it’s especially important that Congress provide strong protections to prevent servicers from taking advantage of borrowers and to protect borrowers from foreclosure.”

This new bill would grow the Federal Housing Finance Agency’s oversight of mortgage service companies that do business with Fannie Mae and Freddie Mac.