Determining how large of a mortgage you can afford is generally the first step for budding home buyers.

March 17, 2011 By DanFullmer Leave a Comment

Follow these simple rules to make sure you don’t get in over your head.

Being aware of how much mortgage you can afford is an essential step for all soon to be home buyers.  By understanding your lending qualifications, you will avoid stretching your finances and ensure that you purchase a home you can afford.  There are many professionals that can offer guidance in this area, though doing your own due diligence and calculations is a vital part of the process.  After all, you know more than anyone about your personal budget and income limitations; as well as what level of disposable income you are comfortable with.  Let’s take a look at a few good rules to remember when calculating how much mortgage you can afford.

At one time, a good rule of thumb when deciding how much mortgage you can afford is that you should not borrow more than one and one-half times your gross annual income to purchase a home.  However, recent surveys conducted by real estate experts and financial advisers have suggested that you can realistically buy a home which costs two and one-half times your gross annual income.

The most important thing to consider isn’t the sale price of the home, but the resulting monthly payment; considering that this is the amount you will have to write a check for every month.  Most mortgage rules suggest that your monthly payment should always be less than twenty-eight percent of your gross monthly income.  Before making any real estate investment, you must always consider the costs for property taxes and homeowner’s insurance.  Property tax and insurance amounts will vary depending on which home you purchase, and it is vital to include these costs in your total expenses.  You must conduct a thorough review of the expenses involved for each specific property you are considering.  Always make sure you are fully aware of your total combined monthly payment before you make an offer on any property.

There are plenty of mortgage brokers and real estate agents to choose from, and it is important to work with reputed ones when you are ready to look at properties and get pre-qualified for a mortgage.  These tips on how much mortgage you can afford are very useful; however you must be aware that home buying is not a simple process.  There are still many other factors to consider.

When borrowing a large sum of money and investing in a home, it is critical to consider consistency of income.  Your lender will expect you to pay a stipulated amount for your principle, interest, property tax and insurance each month; therefore your salary or business income must be consistent enough to meet that obligation.  Unless your income is permanent, it is not wise to be in too much of a hurry to buy a home.

Monthly expenses in today’s economy are seldom constant, and with rising inflation they are bound to increase over time.  Taking this into account, along with fluctuations in income, is a very good idea.  By looking at these factors as well, you will be able to budget for other expenses and make sure that your mortgage payments continue to be affordable.  You certainly want to avoid your mortgage payment putting you into a tight financial position, even if this means holding off on a purchase until your income is better able to handle the home of your dreams.

 

Filed Under: Buying a Home, Mortgage Education Tagged With: , , ,

Debt Repayment Plan – Debt Snowball Illustrated

March 10, 2011 By DanFullmer Leave a Comment

Getting out of debt is becoming the new cool thing to do, so how do you do it the right way?  The main objective is to build energy like a snowball rolling down a mountain.  Each time the ball rolls it picks up new snow flakes and it get larger and large until it grows large enough to over take any object.  Money can be like that for you, you can save money and the interest builds on itself, your debts unfortunately grow faster in interest as it compounds against you.

In the money game, you want to build excitement and momentum through a series of small victories; this happens by paying off the smallest debt first and then applying the payment savings to the next smallest debt.  Now many will say in the game another strategy is to pay off the highest interest rate first, I have run the numbers on hundreds of cases and the debt free moment is almost the same in either case.  Sadly, there is one thing that will happen if you tackle the higher interest rate first, most often you will quit playing the game.  If you do not see your debt load decreasing you will not stay excited and focused.  Once the game is started and the ball is rolling the force becomes very powerful against the debt and builds future wealth.

Now some people are discouraged right now because they are upside down in their homes, let me show you how it still works for people who are upside down.  The mortgage shown in the illustration below is for a home worth $165,000, but has an existing loan of $200,000.

Playing the Game:

Step 1 – Write down all your debt(s)

CreditorBalanceInterest RatePayment
Credit Card #1$5,10012.0%$50
Credit Card #2$5,60013.5%$120
Auto Loan #1$3,8008.0%$270
Auto Loan #2$17,0007.0%$450
Student Loan$5004.0%$50
Mortgage$200,0007.0%$1,520
Totals$231,300$2,460

Step 2 – Organize your debts from the smallest to the highest balance

CreditorBalanceInterest RatePayment
Student Loan$5004.0%$50
Auto Loan #1$3,8008.0%$270
Credit Card #1$5,10012.0%$50
Credit Card #2$5,60013.5%$120
Auto Loan #2$17,0007.0%$450
Mortgage$200,0007.0%$1,520

Step 3 – Make a list of any extra resources you have to generate some cash
Yard Sale, convert credit card miles to cash…. Use the extra money you generate as part of your first payment to the smallest balance.

Step 4 – Begin to apply the payments to the debt
If we use the numbers above and project out, in 4 years the remaining debt is $172,438, which is part of the remaining balance on the mortgage.  If we project out 11 years 7 months we are debt free.  So we turned the current upside down home, into a home that is owned free and clear without adding additional money each month from your current debt load.

Now you will have $2,460 in monthly cash flow that you were used to spending, there is no need to buy a bunch of toys and blow that money each month.  What if you saved the money at a 5% grow rate for the remaining 18 years of a 30 year plan?  $849,499.55 would be the amount that you would add to your retirement.

There is no need to hang your head if you are in debt and are upside down in your home, if you have a job and can continue to make the payments.   I can show you there is light at the end of the tunnel, email me anytime dan@affinitymortgage.com

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Buying a Home – Smart or Scary?

February 9, 2011 By CameronMcCown Leave a Comment

It is important to consider all of the facts when deciding whether to buy a home. Events like the credit crisis, millions of foreclosures across the country, and the housing bubble burst have dissuaded many otherwise-smart investors. You may wonder if buying a home is such a good idea after all. However, the important message to take away from these events is not that buying a home is a bad idea, but that you must be smart about buying your home.

Like every type of market, the housing market unavoidably has its ups and downs. That doesn’t mean buying a home is a bad investment. As a long-term investment, home ownership is still one of the best investments for individual households. Historically, real estate has consistently increased in value, despite shorter periods of depreciation due to local markets and/or national economic conditions. The data shows that homes generally appreciate about 5% per year.

Savings & Investment

Five percent may not seem like a great return on investment, but you have to think about it in the context of the situation. For example, let’s say you put 10% down on a $200,000 house. That’s a $20,000 down payment, or initial investment. At a 5% annual appreciation rate, your $200,000 home would gain $10,000 in value during the first year.

Earning $10,000 on an investment of $20,000 is a whopping 50% return.

For further perspective, let’s say instead of spending that $20,000 on a down payment, you invested it in the stock market. With a 5% return, you would gain only $1,000 in profit.

Tax Benefits

So now you’re saying that a home may have a higher return, but that’s before you consider all of the costs of home ownership, such as taxes, etc. Well, think of it this way: your property taxes as well as the interest on your mortgage are both tax deductible. You can deduct those costs from your income, thus reducing your overall taxable income. In other words, the government is subsidizing your home.

Other Benefits

It’s easy to get carried away with all of the economic reasons for home ownership, but it’s important to remember that not every reason is financial. Have you ever wanted to paint the walls of your apartment? Well when you’re renting, you can’t. Has anything in your apartment ever needed updating, but the landlord refused to do it? When you own a home, you can make the space yours in almost any way you want. And you benefit when you do home improvements, both financially and psychologically.

Homes generally have more space, for storage, living, etc. than other living arrangements. Not to mention that you have space outdoors for barbecuing, pets, and kids. Owning your home carries with it a sense of pride, accomplishment, and even an elevated social status.

So when you’re considering buying a home, consider the broad range of benefits that owning a home can have. And always make sure you have an experienced Mortgage Planner to help make sure you’re getting a home that is right for you, both financially and psychologically.

Filed Under: Buying a Home

Moving Up – Handling the Mortgage on Your Next Home

January 14, 2011 By DanFullmer Leave a Comment

You have bought a home before, even though it has been a few years, you know what you are doing right?  I am here to tell you that buying your next home is different than buying your first home, the biggest difference you will find is in the mortgage.

Remember back to when you bought your first home, did you come up with the price you could afford or did the mortgage company give you a dollar amount based off a maximum payment?  They probably told you.  They also told you that you would need a certain amount for your down payment.  You really had no choice, but to follow the instructions and find a way to save up for that amount needed.  You probably skipped going to movies or out on dates, maybe even avoided a vacation; quite possibly you asked for a gift from a family member to help as well.  Then came closing day and you had a minor panic attack as you wrote that large check for your down payment.  You no longer had a cash cushion, and joined the ranks of the “cash poor/house rich.”

So what was the reason you wrote that check?  The mortgage company said you had to the first time.  What do you do if you are moving up?  What’s next?  Well when you sell your home and you have an amount left from your equity, most buyers buy their second home the same way they bought their first home.  They will write a check for the down payment that is equal to 100% of their assets.

There are two major reasons why they do this:

1) they did it before

2) the new home cost more and they are scared.

When you bought your home before you did what it took to come up with the money to get into your dream home, this required you to empty your bank account.  It only seems natural and normal to do it again.  Another reason is the bigger the down payment, the smaller the mortgage payment.

Though it may have made sense to put all your assets in one down payment for your last house, it does not necessarily make sense to do that again.  Last time, you used all of your resources and energy to find the money to accomplish the dream of home ownership.  This time you need to be more strategic, think through the process.  You have to recognize the difference between how much home you can afford and what you will actually buy.  This time you do not have to go to the limit, as most people do the first time.  Last time you probably pushed the limit and asked the lender to tell you the maximum you could afford.

This time it can be different, this time you can take your time to analyze all options that might be available to you.  In most cases, it does not make sense to roll all of your liquid assets into the new home. Even though you may be able to afford to put more money down than is required, don’t do it!  Instead do only that which is required and take as big of a mortgage as they will allow you to have.
The extra cash available will act as a reserve for the new mortgage payment, and in the event that financial troubles occur you will be covered.  Additionally, repairs may be needed from time to time and there is no need to incur random debt to fix a water heater or furnace.

While you are not using the money, keep it invested for the rainy day.  Most major financial troubles that come up in life can be overcome by having a reserve of $10,000 in the bank.  So if you need to use some of the money left over, work to raise the reserve back to that minimum.  Never give all of your money to the bank, let it work for you.

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5 Financial Hazards to Avoid – Voyage to Your New Home

January 5, 2011 By DanFullmer Leave a Comment

If you have decided to test the waters and explore the idea of home ownership, you will have many decisions to make before your journey is complete. Faced with these decisions individuals and couples often get mixed information and end up making the wrong choice.  The following is a short list of 5 things you need to do to keep from having to use your seat cushion as a flotation device.

Number 1 – Start with a Plan

One of the worst feelings in the world is being caught off guard and unprepared.  Your plan needs to start with a review of your financial well being.  Contact your mortgage planner and have them walk you through credit or income issues.  Better credit will mean more options for structuring a mortgage plan for you.  Nothing will hinder your financial plan faster than paying too much in interest for your home.  If you review your credit months ahead of time, you will be able to fix any issues that may exist.

Number 2 – Keep Your Credit Cards Balances Low

Too often I see people get excited about the possibility of buying a home, so they start to furniture shop as well.  Nearly every furniture store offers 0% interest for some amazing time frame, and most of the time they’ll succeed in pulling you right in. Now you have this new debt which can lower your score, or better yet, make it impossible to get a loan.  Wait until you have the new home and then add the furniture.  Ask your mortgage planner before you make any big purchases.  No need to “keep up with the Jones’” as it will cost you in the end.  For three months leading up to submitting your home loan application through the time it takes to close on the new loan, keep your credit card balances as close to zero as possible.  This will increase your credit score and give you the best shot at the lowest rate available.

Number 3 – Do Not Change Banks

There are always advertisements noting the benefits of switching from one bank to another.  Though some of these perks surpass what your current bank is offering, do not move anything until you have closed on your new home loan.  If you make changes, the paper trail you will have to gather will make you want to hurt someone.  Underwriters, by nature, are looking for something you have done wrong, so keeping all accounts as they are will keep them off your back.  If you have no choice but to change banks, keep a copy of every withdrawal and deposit.  Try not to make cash deposits that are impossible to track, such as cash gifts from friends or family or cash used to purchase something from you. If you’re pulling money out of one account and placing it into another, be sure to deposit the exact amount withdrawn. You will need to provide copies of everything so try not to create extra work for yourself.

Number 4 – Constant Work Habits

A constant or steady work history is exactly what lenders want to see.  If you change your employment while house hunting, make sure you are increasing pay or responsibility and try to stay in the same line of work.  Making a change that is not consistent with your current line of work or that doesn’t improve your situation with increased responsibility or pay can make things more difficult in the underwriting stage. Being completely open about any job changes to your Mortgage Planner will be extremely helpful. Having this information upfront will enable both of you to be able to come up with a plan that is fitting to present to the underwriter.

Number 5 – Plan Early

Life is much easier if we slow down and plan. Start with your Mortgage Planner instead of a Real Estate Agent.  Agents are great for house finding and working the contracts, but you don’t want to fall in love with a home before your financial house is in order.  You owe it to yourself to go slow down in the beginning.  Your agent will appreciate you for taking the time to “clean house” before getting them involved.  This will help you know exactly what you can afford before your eyes stretch your pocket book.  Most of your friends will do it the other way around, kicking themselves through the whole process while getting frustrated with their Realtor and Loan Officer and finding that they envy the ease and rapidity of your home purchasing experience.

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Debt Relief – Secrets You Should Know

January 4, 2011 By DanFullmer Leave a Comment

In difficult economic times, debt can seem, and in some cases be, overwhelming.  Many studies show that the stress that results from financial hardship can have a negative impact on your physical and emotional wellbeing.  While you are sinking into debt, you may be really concerned that you will not find relief from it.  Although you may face financially tough times, there are lenders and agencies willing to help with your debt relief needs.

While looking for help with your current debt burdens, you will soon discover that there are three main types of debt relief: credit card balance transfers, credit management or counseling agencies, and debt consolidation loans.

Debt relief consolidation is offered by credit card companies via a balance transfer agreement. They will offer a lower rate than what you currently have on any other credit cards if you transfer the balances of those high rate cards to a new account. This looks appealing at first because it shows significant monthly savings; however, those low rates that they dangle in front of you may only be temporary.  Be sure to read the fine print.  Often called a “teaser rate” or a “promotional rate”, those terms won’t look so good later down the road when you are surprised by the higher rates implemented after the promotion ends.

Another option are the credit management or counseling agencies.  They can offer you debt relief consolidation by making alternative arrangements with your creditors to pay off your existing debt. The credit counseling agent will cut a deal with lenders to minimize your monthly payments, minimize your interest rate and often the total amount owed. In this situation you will make one monthly payment to the credit counseling agent who then will pay out the individual payments to each creditor. If you decide that a credit counseling agent is the correct route for you, be aware that most agencies have a fee for their service.  Depending on the agency, this fee is paid by either the consumer or the lender the terms are being negotiated with.  There are some counseling agents that make their money by threatening your current creditors with your impending bankruptcy.  This practice is called a “cram down.”  The current creditor gives the agency a new payoff based off of the threat that you will go bankrupt if they do not give you a lower payoff and payment and then the agency adds their fees to this new payoff. Make sure you look into the practices of the counseling agency you choose before you sign the dotted line asking them to represent you.

With a debt consolidation loan, the lender pays off several of your consumer debts and creates a brand new loan for you that will allow for smaller monthly payments than the original monthly payments. Use caution when using a loan as debt relief consolidation, be knowledgeable about the terms of the loan otherwise you may not be getting the type of help that you seek. Many lenders will mainly focus on the monthly payment amount and not the total picture of the payback balance. If they are offering a lower payment, make sure the new loan program is appropriate for you and then focus on the interest rate. If you focus on the interest rate first you can easily go into the wrong program.  This lower payment is achieved by drawing out the length of pay back; if you work with a mortgage planner, you will be able shorten the life of the outstanding debt in most case quite significantly.

Though no one thrills at finding themselves in a financially difficult situation, don’t let your debt concerns interfere with your emotional or physical health. Save yourself weeks or months of stress and search for the right debt relief consolidation for your situation by using one of these three common methods and find the relief that you deserve.

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Preserving the Mortgage Interest Deduction

December 2, 2010 By DanFullmer Leave a Comment

Below is an article from the National Association of Home Builders, might want to go to a quite room to read this you will probably use some bad language not suitable for children:

NAHB’s Effort on Preserving the Mortgage Interest Deduction

As you have heard, the National Commission on Fiscal Responsibility and Reform has released its final report recommending a number of significant changes to federal spending, entitlements and the tax code.  This report will serve as a starting point for congressional discussions on tax reform next year, and therefore, the recommendations it contains should be taken very seriously.

The overall proposal would eliminate nearly every tax break, with the revenue from this being used to lower marginal tax rates and reduce the deficit.  However, the plan does recommend retaining a few targeted provisions to promote jobs, homeownership, health care, charity, and savings.

While the lower marginal tax rates may look appealing, the devil is in the details.  The proposal shows that taxes would increase across the board for all Americans at all income levels; in fact, the highest percentage increase would fall on those in the lower-income range.

The plan would convert the mortgage interest deduction into a 12% non-refundable tax credit available to all taxpayers, not just those who itemize. The current $1 million mortgage cap would be lowered to $500,000.  No deduction/credit would be permitted for second homes, home equity or state and local taxes.  Further, the capital gains exclusion on the first $500,000 of gain on a home sale, as well as the Low Income Housing Tax Credit, would be eliminated.

New Website a Key Resource to Engage Consumers and Media
NAHB has launched a new website at www.SaveMyMortgageInterestDeduction.com that provides NAHB members and consumers with up-to-date information on the threat to the mortgage deduction and engages the public in defense of this cornerstone of American housing policy. The site debunks the myths about the deduction and contains fact sheets, frequently asked questions, press releases, media stories, statistics, reports, and more. Most importantly, SaveMyMortgageInterestDeduction.com tells visitors how to stay informed and make sure their opinions are heard on this crucial issue by connecting to NAHB’s Facebook and  Twitter social networking communities and our Eye on Housing blog.

I strongly encourage you, your family, friends and business associates to visit the website, join in the discussion on Facebook.com/SaveMyMID and Twitter.com/SaveMyMID, and spread the word about what this proposal would mean to consumers, communities, and the overall housing industry.

Going Forward
We anticipate that debate on this issue will begin in earnest when the new Congress convenes in January, and at that time we will be reaching out to you, our members, for your help in our grassroots efforts to defend the mortgage interest deduction and respond to the other housing-related proposals in this report.

Of course, the impact of the proposals in the commission’s report extends far beyond the mortgage interest deduction and the consumer per se. Everyone in our industry – remodelers, multifamily builders, large builders, small builders, green builders, our associates, and everyone in between – has a tremendous stake in what Congress decides going forward. While the focus of our new website is on the mortgage interest deduction (a topic that clearly resonates with consumers), rest assured that the thrust of our advocacy agenda in Congress will, and does, encompass the preservation of all of the key housing incentives in our nation’s tax code.

A Final Note
I realize that other coalitions and organizations have contacted you regarding their websites and advocacy efforts related to the mortgage interest deduction. You should know that, since this issue first appeared in the news, NAHB has been highly engaged on Capitol Hill and in the media, and has proactively developed cutting edge research and polling data to ensure that all of our members’ interests are fully represented as the debate unfolds.

Once again, we find our industry in a fight that will require every member of the NAHB federation to unite with a common voice and common purpose.  I know I can count on you to stand shoulder-to-shoulder with your fellow NAHB members to stop this attack on the American Dream.

Should you have questions regarding the commission’s report or the above communication, please feel free to send them to publicaffairs@nahb.org and our staff will respond as quickly as possible.

Thank you,
Bob Jones
2010 NAHB Chairman of the Board

Filed Under: Mortgage Education Tagged With: ,

Another Reason Some Adjustable Rate Mortgages are Not BAD!

December 1, 2010 By DanFullmer Leave a Comment

The graph above shows the long-term rates for the treasury bonds from 1799 to 2008.   Remember the government uses T-bills to finance its debt.  The white gap in the graph was a time when there was no government debt.

So why am I saying this makes some Adjustable Rate Mortgages look good, I am sorry the graph is a little blurry, but in the middle it shows the average over that 200 year time frame the rate was 4.71%.  The only time that the rate was way above the average was when the Fed did not understand inflation and which required the treasuries to be sold at a higher rate to out pace inflation.

So how does that translate to mortgages, and more importantly, how does that relate to saving money if I do a variable rate over a fixed rate?  Good question, I get this question all the time.  Well the when adjustable rate mortgages become adjustable they use two part to calculate the new interest rate.  First is the margin or spread the bank charges on the money.  This is usually between 1.5% and 2.75%.  On FHA adjustable rate mortgages, most are at 2.25%.  The second part needed to calculate the new interest rate is the index, FHA loans use the yields on Treasury securities at “constant maturity” or fancy words for they average long term bonds to create an moving average index. 

The average for the last 20 years is, 4.01466% and the last 10 years is  3.03792%.   If we add the margin to the average index the rate would be between 5.25% and 6.25% on average.

A 30 year fixed mortgage over the same time period would be around 6.75% on average.  Now I know you have been told that the adjustable rates are what caused most of the financial melt down, but it was not the product that was bad, rather the individuals using the product not using it properly.  For many it was like playing basketball with a football.  Can you get lucky and make a basket with the football, sure but try to dribble a football on a fast break.  My point simply is that it can be used as a great mortgage option, if used with part of the rest of your financial plan.

The other thing to remember is that bankers know that you will refinance right now almost every four year minimum.  So if you take the higher rate on the fixed product the bank makes more money.  If you do this every time you do a loan, the bank makes a lot more money.  Think back, how many times have you refinanced in the last 10 years?  How many in the last five?  I have some clients that have use this option to refinance about every 18 months and each time we lowered their rate without adding any closing costs to their loan.  You can do the same thing!

All I ask you to do is stop being afraid and start doing some research, see if this would work for you as well.

Now let me tell you the catalyst that makes this work even better.  You need to not take the adjustable rate to just lower your payment and spend the, that would be a disservice to yourself; rather you need to make your mortgage payment at the 30 year rate.  So you are adding additional principle payments each and every month against your loan.  Spending the difference is what most people used adjustable rates programs for in the past.

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Mortgage Interest – Not Deductible Again!

December 1, 2010 By DanFullmer 1 Comment

When will the SMART people in charge learn?

A draft proposal from the National Commission of Fiscal Responsibility and Reform touched off a firestorm in Washington on Wednesday.  The proposal included, among other things, a suggestion to reform the deductibility of mortgage interest.  Within minutes of the proposal being made public, the Mortgage Bankers Association produced a statement opposing any discussion of changing the current system.

The debt reduction draft report, which was referred to on television as “a grenade rolled into the center of the room” ignited intense debate, especially concerning proposed changes to Social Security.  The suggested mortgage interest deductibility change is modest, however, in that it only proposes to eliminate interest on home equity loans, second homes, and first mortgages with a balance above $500,000.

Chairman of the Mortgage Bankers Association, Michael D. Perman, released this statement:

“Given the fragile state of the nation’s housing market, now is not the time to be scaling back incentives for home ownership.  The mortgage interest deduction is one of the pillars of our national housing policy, and limiting its use will have negative repercussions for consumers and home values up and down the housing chain.”

Mr. Perman was also concerned over proposals that would tax dividends and capital gains at standard tax rates.  He said this change could seriously impact investment in commercial real estate.  The Mortgage Bankers Association did state concern over the ballooning national debt, and pledged willingness to help identify solutions.  Still, Mr. Perman stated, “we cannot support proposals that would chip away at the foundations of the real estate market.”

Earlier this week, Mortgage News Daily columnist Rob Chrisman wrote this about mortgage interest tax deductibility…

“Any time there is a change in power, and we’re running a deficit, talk comes up about changing the deductibility of mortgage interest. The United States certainly pushes folks toward borrowing. If you don’t believe it, look at the mortgage deduction that homeowners have. (Interest on credit cards stopped being deductible in 1986.) Companies can write off almost all the interest that they pay on corporate debt (but not dividends, so debt is cheaper than equity). In our business, of course, this helps promote home ownership, since people have to come with less of a down payment. An interesting question to ask a borrower is whether or not they’d buy a home if the tax deduction went away. In countries that don’t offer the tax break, like England, home ownership is about the same as the US, but house prices are much lower. And the argument can always be made that economies are better off when people are making decisions based on economic principals rather than tax considerations, and in fact the current crisis is due in part to increased borrower debt magnifying risk. Many economists feel that any system meant to encourage people to take on more debt is not a great thing.”

If we were forced to summarize the effects of the great recession into one word, that word would have to be “change.”  These proposed changes to tax code will undoubtedly have unintended consequences, but we already are at the point where much of what we believed about the post-WWII housing arena has either come undone or been seriously damaged.

There have also been intentional changes in the housing market, which will certainly have long-term impacts on the US housing system.  The most interesting of these changes is the changing behaviors of US consumers.  One recent poll showed that, among America’s wealthiest individuals and those most able to afford homes, interest in home ownership may in fact be waning in favor of renting.

This conscious change in attitude is most likely a response to recent price corrections, and volatility in the housing market which has made it apparent to many that real estate is not a risk free investment.  This ideology so permeated our psyche that it was considered indisputable fact by many, and the realization that home prices can indeed decline has been a hard pill to swallow.  Add to this a reduction in mortgage interest tax deductions, and it’s not too difficult to determine what the lasting effects could be.

Regardless of this perception, however, we can’t fail to notice the opportunity that lays before us.  Housing prices are not at the lowest levels in many years, and mortgage rates are at all-time lows.  Buying a home in this market could very well be the equivalent of so many of our parents’ home ownership experiences.  Taken as a long-term investment, there are still very few that have grown as significantly as real estate over the past 30-years; and once this correction is behind us, there is no reason to believe that this appreciation trend won’t continue.

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Mortgage Insurance – Change is Not Always Good!

November 29, 2010 By DanFullmer Leave a Comment

Mortgage insurance (also known as mortgage guaranty) is an insurance policy which compensates lenders or investors in the event of default of the mortgage loan. Default comes from a home owner not making their payments, or doing something else in the Deed that would cause a foreclosure.  Mortgage insurance can be either public or private depending upon the insurer and the mortgage option that is taken upfront.

For example, Mr. Jones decides to purchase a house which costs $200,000. He pays 5% ($10,000) down payment and takes out a $190,000 ($200,000-$10,000) mortgage.   Investors require mortgage insurance for mortgage loans which exceed 80% of the property’s sale price or appraise value.  Due to the fact that he has limited equity, Mr. Jones will be required to pay for mortgage insurance that protects the lender against his default. The lender then requires the mortgage insurer to provide insurance coverage at, for example, 20% of the $190,000, or $38,000, leaving the lender with an exposure of $152,000.

Like with any insurance the insurer will charge a premium for its coverage, in the case of mortgage insurance it may be paid by either the borrower or the lender.  If the borrower defaults and the property has to be sold at a loss, the insurer will cover the first $38,000 of losses.  Any additional loss is eaten by the investor.  Mortgage Insurance coverages offered by mortgage insurers can vary from 20% to 50% and higher.

To obtain public mortgage insurance from the Federal Housing Administration, Mr. Jones must pay a mortgage insurance premium (MIP) equal to 1.00 percent (this amount can be paid upfront or financed into the loan) of the loan amount at closing. This premium is normally financed by the lender and paid to FHA on the borrower’s behalf. Depending on the loan-to-value ratio, there may be a monthly premium as well and varies from .85% to .90%.

On September 7th 2010, the Federal Housing Administration made yet another change to Mortgage Insurance Premiums.  It should be considered a change for the worse, the monthly premiums of .85% to .90% used to be .50% to .55%.  Now they try to offset that higher monthly rate by lowering the upfront premium from 2.25% to 1.0%.  I will not complain about that piece being cheaper at all.

Let’s put some math to this well, a $150,000 loan amount would yield a MIP/FF of $1,500 versus $3,000.   The monthly mortgage premium would be $68.75 with the current premium but increased to $ 112.50 with the new premium as it is implemented. So, how do you view the benefits of these changes?  Well I believe that banks and companies need to make money, but to raise rates right now may not be the best time.  People in the industry are trying to entice people to buy the existing homes and refinance those who can still afford their home, but raising the cost to do so will not make that easy.  Yes I am stretching my head too!  If there is excess inventory, meaning it is a buyer’s market and interest rates are historically low, why slow that down by raising one of the major costs?  This increase is not a reason not to buy, as much as it is annoying.

We need to look at the reason FHA has to keep changing the mortgage insurance requirements, the easy answer would be Federal agency have a hard time leaving well enough alone.  That answer is way too easy, so let’s go deeper.

Many say that the stabilization of the FHA is paramount to enable new home buyers to purchase homes with a low down payment.  Providing the FHA with a few months of receiving the previous higher 2.25% up-front MIP, allowed the cash flow for the agency to increase substantially.  The new decrease of the MIP to 1% will decrease the cash flow, but prove to make the agency way more money in the long run, as the monthly premium is almost double.  The FHA is banking on home owners to stay put and own a home for a long while, or hold their new loan for an extended time.  Due to the fact that rates are so low this is a safe bet.

Here’s the problem though, there is a reserve requirement for FHA, meaning they have to keep so much of the insurance money that comes in from lending as liquid assets or a reserve.   This requirement is set by Congress and is now at a 2% minimum.  Well they raised the upfront to 2.25% to get back above the reserve requirement and avoid taxpayer help.  So why are they now charging more each month.  Sit down for this part; FHA is part of HUD (Dept of Housing and Urban Development) and because of this every dollar that FHA makes goes to the balance sheet of HUD.  Then HUD right now is giving about .21 out of every $1.00 back to FHA to fund its current programs.  So what does HUD do with the rest of the money?  Well they have programs to, fight homelessness, rebuild communities and revitalize cities.

Right now during a tough economic time it does not seem like a good idea for FHA to raise premiums on those that can still pay and use it to help rebuild distressed communities.   It seems like a better idea to let FHA keep maybe 20% more of their money and allow that many more current homeowners to qualify to either buy up some existing homes inventory or refinance their current home loan, allowing for more money each month to buy additional goods and services.  Then after that dust has settled and the recession is really done, use the money that is in excess to rebuild the run down communities.

Let me end with answering one of the questions I get at least a couple times a week, “How do you get out of paying the monthly premium?” Homeowners can remove mortgage insurance when the home loan is 78% or less than the home value. Since it will be tougher to remove the mortgage insurance due to a slower economic upturn, the FHA will be banking on the money for quite some time, further increasing their cash position, and enabling their programs to be offered to many more home buyers.

If FHA continues to be part of HUD, it will have fluctuation in the mortgage insurance they charge; whenever HUD has a new project they need to fund the premiums will be going up.  I would strongly suggest that you write your Congressman and tell them to consider moving FHA outside of HUD.

Find out more info on FHA and their recent changes at www.hud.gov. If you have questions and do not wish to wait on recorded lines, remember that this local Mortgage Planner will have the answers as well.

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