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MORTGAGE INSURANCE PART II

Last week I talked about mortgage insurance, which is often or usually required when you are putting less than 20% down. The two main options would be an FHA loan, or a loan with private mortgage insurance (PMI). Loans with PMI made after July 29, 1999 have a neat feature where the PMI comes off automatically when your loan balance drops to 78% of the original loan balance.

If you have an FHA loan older than June 3, 2013, the process is very similar. If your balance drops to 78% of the value of the home at the time the loan was made, the monthly insurance will automatically stop. So if you bought your home using an FHA loan, the value they will use is the purchase price most likely.

However, if you got an FHA loan on or after June 3, 2013, it is a VERY different story. The monthly mortgage insurance never comes off. As in NEVER. It doesn’t matter if you bought a home for $300,000 and it’s now worth $600,000 and you’ve paid extra towards your principal so your balance is now $100,000. NEVER.

So the only way to effectively cancel monthly FHA mortgage insurance is to pay the loan off in full and/or refinance it. Right now, rates are low, so as long as you have the equity to refinance into a non-FHA loan, that could be a wise choice. But if rates go up, you could be stuck in a situation where you’d LIKE to refinance out of your FHA loan to lose the monthly mortgage insurance premiums BUT with the higher interest rate, it doesn’t make sense. If you bought a home over the last few years with an FHA loan, call your favorite lender and see if it makes sense to refinance out of it.

PMI REFRESHER

In the distant past, lenders would not lend more than 80% of a home’s value, meaning the buyer had to come up with 20% as a down payment plus their other closing costs. This was seen as a huge challenge to many potential home buyers, so the government created the Federal Housing Authority (FHA). With an FHA loan, the buyer could buy a home with very little down payment, and FHA would insure the lender against their losses if the buyer didn’t pay. The buyer pays for this insurance as an up-front and monthly insurance premium that’s added to their monthly payment.

These insurance fees were quite large and increased over time, so private companies got into the act, which led to the creation of private mortgage insurance (PMI). So instead of the government insuring the loan, a private company would guarantee payments to the lender, and charge the buyer either up-front or monthly insurance premiums.

There are pluses and minuses to FHA vs. PMI, which I don’t have room to go into fully here. One of the biggest differences is in regards to when you can stop paying the monthly insurance.

For loans made after July 29, 1999, PMI drops off automatically once your balance drops to 78 percent of the original purchase price. If your loan is older than that, you can call your lender and ask if they have a process where it can be dropped. You may have to pay for an appraisal to prove you have at least 20% equity. If they won’t drop it, your only option may be to refinance the loan with a new loan that doesn’t have PMI.

FHA loans have their own rules for if and when you can stop paying the monthly mortgage insurance premium. I’ll discuss that in next week’s article.

CLOSING LATE

I’ve always told my clients that the closing date is a “target date” because things can sometimes come up at the last minute that can delay the closing a day, or a week, or sometimes even longer. It seems like it’s RARE to close on time nowadays.

 

The reasons for the delay are many. Sometimes there is a small change to the buyer’s closing costs, so the buyer HAS to be given another few days to review the new figures. This is according to a relatively new federal law that was put in place to eliminate “surprises” at the closing table for the buyer. Other times the buyer’s lender needs more documentation from the buyer about their finances or a letter to explain something. But more often than not, what I’m seeing right now is the lenders are just swamped with volume. With interest rates back down, the refinance market is big again. This means more loans are trying to get made and closed than the system can handle. They used to make purchase loans a priority, but even if they are, they are still just too busy to get everything done.

 

So what to do about it? First, agents probably need to stop writing 30 day close of escrow dates on their contracts unless they are REALLY sure it will happen. Better to shoot for 40-45 days. Second, sellers need to not make hard and fast plans assuming the transaction will close on time. Be sure to leave wiggle-room in moving plans regarding moving trucks and if you need these funds to purchase another property. Asking for possession of the home after closing would be a good idea if that can be negotiated. This means you don’t move out until the deal is DONE and the money is in your account.

 

BI-WEEKLY MORTGAGES

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You may have seen ads that say, “Pay off your mortgage years early!” These are usually ads for companies promoting a bi-weekly mortgage program.

 

There is no “magic” here, it’s just simple math. Normally you make 12 payments per year to your lender. In a bi-weekly plan, you pay half of your normal payment every two weeks. There are 52 weeks, so that’s 26 half payments, which means you are paying the equivalent of 13 payments each year. The extra goes to reduce your principal (some lenders require you to tell them to apply it to the principal or they’ll hold it in a “suspense” account). The company will charge you several hundred dollars to administer it for you, but you save thousands in interest.

 

Most financial “experts” are against signing up for these programs. They say you should just do it yourself and save the money. I agree with that in principle, but that argument only makes sense if you actually have the discipline to DO IT in order to get the savings. Their other argument is that by doing it yourself you free yourself from the obligation to do it contractually. This means if you come up short due to unexpected expenses some month, you can just skip it that month, and that does sound like sage advice to me.

 

But several bi-weekly companies just made the news recently when it was found that they were collecting payments from their members but then NOT sending them in early. They would sit on the funds and collect interest, then send the whole payment in just before the due date. So they were collecting the admin fee AND extra interest (called “float”) but the customers weren’t benefitting as much as they should have. So if you want to pay extra to your mortgage, just do it yourself.

DO I DIVORCE MY MORTGAGE COMPANY, TOO?

When a couple divorces, and they agree that one of them will keep the house, they often forget that the lender expects BOTH parties to be responsible for the original loan until it is paid off. This is true even if a court has declared that only one of the parties is to be responsible for the payments.

 

Many a divorced person is surprised to get a call from their lender when the payment is late and they say, “But the judge said that my (ex-husband/ex-wife) is supposed to make that payment…” A divorce decree does not void a loan agreement. If the responsible party doesn’t pay on time, the other party must pay it, and then collect through the courts from the one that was supposed to pay it.

 

While this might not seem fair, the lender’s position is justified. They made a decision to lend a large amount of money based on an application from two people. Even if one of the parties doesn’t produce an income, they still have assets and their credit rating to protect, which the lender relied upon when making the loan in the first place.

The party not living in the home may have concerns about the payments being made on time to protect their credit rating. In addition, having that loan on their credit report will make it difficult to qualify for another loan, since the lender will include that payment when calculating their debt ratio.

There are several solutions: The property can be sold, which will pay off the old lender, and both parties will be relieved from liability. Another solution is for the remaining party to refinance the loan in their name only. The catch here is that they do need to qualify on their own.

FED INACTION ON RATES

So last week nearly all the “experts” expected the Federal Reserve to finally raise their key interest rate by a quarter of a percentage point. It’s been hinted at for quite a while now. The last few jobless reports and inflation reports seem to support the decision. Most of the financial world had factored that rise into the expectations, formulas and financial products. But then the Fed surprised with NO change, and stock markets across the globe dropped at the announcement.

 

So what gives? If lower interest rates are “good” for the business world (I put that in quotes because many people DON’T think they are good long-term, but that’s another article, or two!), then why wouldn’t people be cheering low interest rates? Borrowers can borrow more at cheaper rates for cars, homes, etc. and that stimulates buying, which leads to more profits, so why the concern?

 

Since the Fed was expected to raise rates based on the data that was out there for public consumption, people are wondering what other negative data are they looking at that isn’t made public? The worry investors have is that maybe things are worse than we’ve been told!

 

I think the Fed just didn’t want to rock the boat after the recent collapse of China’s stock market, which isn’t anywhere close to being resolved. So they were trying to provide some stability and project an image of calmness to the market, which seems to have backfired on them in the short-term. They did leave open the option of raising rates “soon” so we’ll just have to wait and see.

 

RESET AND RECAST

Over the next 12-18 months, many homeowners are going to see changes to their mortgage payment. A few will see their payments go down but some will see a MAJOR increase.

 

The ones that see their payment go down are the ones that took an adjustable-rate loan. Many of them have been fearing their payment will go up, only to be pleasantly surprised that their payment will actually go DOWN since mortgage rates have dropped quite a bit since they took their loan out 5-10 years ago.

 

Others won’t be so lucky. One of the more popular loans made back in 2005 and 2006 was a loan that had a fixed rate for 10 years and then the loan resets and recasts. Reset means the rate is adjusted by adding what’s called a “margin” to an “index.” Let’s say your loan paperwork states that your loan will be a 4% for a set period of time, and then it resets to “LIBOR plus 2%.” “LIBOR” is a common index that lenders use. 2% would be the margin that would be added to whatever LIBOR is at when your mortgage resets. The good news is that right now LIBOR is less than 1%, so your new reset interest rate in this example would be a little less than 3%.

 

So if that was the only change, the person in this example would see their payment go down. However, the loan may also “recast.” If your loan was interest-only for those 10 years, it may convert into a principal-reducing loan, which could increase the payment quite a bit. But on top of that, it will also likely need to be paid off in 20 years (since you are 10 years into a 30 year loan). These two changes can REALLY spike your payment.

WILL GREEK DEFAULT HURT US?

It seems like we’ve been talking about Greece defaulting for a LONG time. Things are coming to a head again quickly and there are renewed concerns that this could be the start of another worldwide economic implosion. People are asking if a Greek default is our new “Lehman moment,” harkening back to the failure of Lehman Brothers in late 2008 when things got bad in a hurry. Since the Greek crisis has hit the news again, interest rates have risen slightly, but not tremendously.

 

Is it possible that this is the start of another huge downturn? Some people think so, however, most of the “experts” I follow don’t think so. If Greece had defaulted a few years ago, it very well may have caused a cascade effect that would have crippled the global finance world, again. However, the powers-that-be have spent the last few years making deals behind the scenes to try to insulate the rest of the world from Greece. It’s all very complicated, of course, and it could still go sideways, but the general idea (hope?) is that while things will be especially rough for Greece, the rest of the world won’t be impacted too greatly.

 

People in the know are watching Italy and Spain very carefully because they have some similar problems (though not as bad) as Greece, but their economies are MUCH larger than Greece. Of course right now creditors are demanding sky-high interest rates when lending to Greece because of the increased risk. The fear is that if creditors start to demand higher rates from Italy and Spain because of what is going on in Greece, this could be the falling domino that could lead to a European recession, which hurts us here in the U.S., too, because of how connected the global economy is.

FHA REFINANCE OPPORTUNITY

Do you have an FHA loan where the rate is higher than today’s market rates? Then there is good news for you! Rates are still very, very low and it’s not too late to take advantage of them. And if you happen to have an FHA loan, there is a program you need to know about.

 

It’s called the “FHA Streamline Refinance,” and it’s only for borrowers that already have an FHA loan. They are very fast and simple to do. You can lower your rate and your payment and it’s a pretty easy process. There is no credit check, no employment verification and not even an appraisal! On top of that, the rate that FHA charges for PMI (private mortgage insurance) went down recently. So not only could you get a lower interest rate, but lower PMI, too.

 

There are some qualifications, but they aren’t too cumbersome: You must be current on your existing loan, it must be at least 6 months from the date you bought the home, you can’t take cash out, and it must reduce your mortgage payment by at least 5%. There are fees associated with this process, but you can usually roll them into your loan.

 

One thing I like to point out whenever anyone considers a refi is the payoff period. Some people refi if it will save them anything per month, even $50. But keep in mind that if you’ve had your loan for 5 years, and then you refi, you now won’t pay it off for another 30 years. So you always have to weigh the savings NOW against having to make 5 more years of payments at the end (IF you are planning to keep the loan and home for 30 years, which very few people do nowadays!).

 

DOWN PAYMENT—THEN AND NOW

In the early 1900’s, home loans were rare. You either had to save over a lifetime, or inherit money in order to buy a home for cash. The few home loans that existed required at least 50% down. The loan itself was a balloon loan due in five years or less. Thankfully, times have changed. Down payment requirements have fallen dramatically over the years.

 

A few decades ago most lenders settled in around the 20% down payment scenario and that was the “norm” for quite a while. Then 10% down become popular, then it went to 3% down, and then nothing down, and then during the height of the mortgage mania, they’d give you a loan for 125% of the value of the property! Of course that was crazy and that blew up in their faces big-time!

 

When the real estate bubble burst, many lenders reverted back to 20% down, but even then loans were hard to get. Good borrowers were having trouble getting loans even if they had the 20% down. And many other borrowers just couldn’t come up with 20% down. So the government radically revamped their lending programs and became the “lender of last resort.” 3.5% down payment loans became abundant, although they came with higher fees in the form of mortgage insurance.

 

Now that prices are back up and foreclosures and short sales have diminished greatly, lenders are feeling more optimistic again. Yes, to get the best rates and terms with lowest fees (initial and monthly fees) you are still looking at 20% down. But if you don’t have 20% down, there are now lots of programs again for 10%, 5%, 3.5% and even 0% down. But thankfully I haven’t seen the return of the 125% loan again!

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