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3.000% (3.001% APR) 30yrs
2.375% (2.381% APR) 15yrs
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What you need to know about mortgage insurance header size

 

The first concerns that many people have with mortgage insurance is “Do I need it?” and “How can I get rid of it?” This article will teach you what you need to know about mortgage insurance, such as types of mortgages that require mortgage insurance and how to eliminate the expense as soon as possible.

Many mortgage loans require mortgage insurance, at least for a period of time. These plans can cost between 0.5% to 1% of the entire loan amount on an annual basis. To put that in perspective, if you have a $100,000 loan, mortgage insurance could cost you $1,000 per year! For that reason, choosing the best type of mortgage insurance is an important part of buying a home.

What types of loans require mortgage insurance?

Conventional loans with less than 20% down payment require private mortgage insurance (PMI). The premium will range based on down payment and credit score, similar to the interest rate of your mortgage. Rates are generally lower than that of FHA loans, depending on credit score. Most PMI policies do not require an upfront payment.

FHA loans also require mortgage insurance. This will be charged back as an upfront mortgage insurance premium (UFMIP) paid at the time of closing, and also as an annual MIP, which is paid in monthly installments and recalculated each year. The UFMIP premium can be added to the base loan amount and financed in with the loan. It has the same premium regardless of the mortgage cost but will cost more if your down payment is less than 5%.

The current upfront payment for mortgage insurance on an FHA loan is 1.75% of the loan amount. The current monthly payment for mortgage insurance is between .80% and 1.05% of the loan amount, divided by 12. The monthly payment is recalculated annually, so it will decrease over time.

VA (Veteran’s Affairs) loans have a VA Loan Guarantee fee that replaces the need for mortgage insurance. This upfront closing fee can be added to the base loan amount and financed in with the loan. Remember, VA Loans are only available to active military and veterans, as well as their spouses.

Types of mortgage insurance

There are four common types of payment plans for mortgage insurance:

Borrower paid private mortgage insurance allows the borrower to pay the mortgage insurance premium monthly. This is the most common type of mortgage insurance.

Single premium private mortgage insurance allows the borrower to pay the premium in a single lump sum at the time of closing. This could save you money over time because the percentage paid can be shy of the sum of lifetime payments on the monthly premium.

Split premium private mortgage insurance allows the borrower to pay a portion of the premium at closing, and then make a monthly premium payment afterward. The benefit of which is that the monthly payment is greatly reduced, however, this type of mortgage payment plan is not very common.

Lender paid PMI allows the mortgage lender to assume to cost of the mortgage insurance at closing, which the borrower will “repay” over time in the form of a higher interest rate. This increase is usually one-quarter to half a percentage point higher.

Discontinuing mortgage insurance

Mortgage insurance for conventional loans can be discontinued once the loan repayment has reached 22% so that the borrower owns 22% equity in the home. The remaining 78% of the loan can then be repaid without insurance.

Your mortgage lender may also approve discontinuation of mortgage insurance if you reach an agreed-upon repayment amount, have good equity, and are consistent with payments. However, this is at the lender’s discretion.

 

What you need to know about mortgage insurance

The first concerns that many people have with mortgage insurance is “Do I need it?” and “How can I get rid of it?” This article will teach you what you need to know about mortgage insurance, such as types of mortgages that require mortgage insurance and how to eliminate the expense as soon as possible.


Many mortgage loans require mortgage insurance, at least for a period of time. These plans can cost between 0.5% to 1% of the entire loan amount on an annual basis. To put that in perspective, if you have a $100,000 loan, mortgage insurance could cost you $1,000 per year! For that reason, choosing the best type of mortgage insurance is an important part of buying a home.


What types of loans require mortgage insurance?

Conventional loans with less than 20% down payment require private mortgage insurance (PMI). The premium will range based on down payment and credit score, similar to the interest rate of your mortgage. Rates are generally lower than that of FHA loans, depending on credit score. Most PMI policies do not require an upfront payment.


FHA loans also require mortgage insurance. This will be charged back as an upfront mortgage insurance premium (UFMIP) paid at the time of closing, and also as an annual MIP, which is paid in monthly installments and recalculated each year. The UFMIP premium can be added to the base loan amount and financed in with the loan. It has the same premium regardless of the mortgage cost, but will cost more if your down payment is less than 5%.


The current upfront payment for mortgage insurance on an FHA loan is 1.75% of the loan amount. The current monthly payment for mortgage insurance is between .80% and 1.05% of the loan amount, divided by 12. The monthly payment is recalculated annually, so it will decrease over time.


VA (Veteran’s Affairs) loans have a VA Loan Guarantee fee that replaces the need for mortgage insurance. This upfront closing fee can be added to the base loan amount and financed in with the loan. Remember, VA Loans are only available to active military and veterans, as well as their spouses.


Types of mortgage insurance

There are four common types of payment plans for mortgage insurance:


Borrower paid private mortgage insurance allows the borrower to pay the mortgage insurance premium monthly. This is the most common type of mortgage insurance.


Single premium private mortgage insurance allows the borrower to pay the premium in a single lump sum at the time of closing. This could save you money over time, because the percentage paid can be shy of the sum of lifetime payments on the monthly premium.


Split premium private mortgage insurance allows the borrower to pay a portion of the premium at closing, and then make a monthly premium payment afterwards. The benefit of which is that the monthly payment is greatly reduced, however, this type of mortgage payment plan is not very common.


Lender paid PMI allows the mortgage lender to assume to cost of the mortgage insurance at closing, which the borrower will “repay” over time in the form of a higher interest rate. This increase is usually one-quarter to half a percentage point higher.

Discontinuing mortgage insurance

Mortgage insurance for conventional loans can be discontinued once the loan repayment has reached 22% so that the borrower owns 22% equity in the home. The remaining 78% of the loan can then be repaid without insurance.


Your mortgage lender may also approve discontinuation of mortgage insurance if you reach an agreed-upon repayment amount, have good equity, and are consistent with payments. However, this is at the lender’s discretion.



millennials short term mortgage 3 1

 

The generation that has graduated from college in the last 5 to 10 years are no strangers to debt, and perhaps have more experience with loans, credit scores, and building credit than any generation to come before them. Student loans were not a necessity 30 years ago, but now require graduates to have a financial understanding of credit, loans, and debt. As they look to become first-time homebuyers, this group may have an advantage.

In a digital age that constantly creates new ways to spend as well as to save, millennial buyers are one of the largest and most sought-after markets. And they know how to spend—and save! It’s true, millennials are not afraid to save money. So why not take this mentality towards building equity, possibly for the first time in your young adult life? Millennials are ready to stop renting and start buying homes.

Here are three reasons buying a home will save money:

1. Start building equity sooner

Don’t just plan for retirement, plan for life. Whether into new investments—creating an estate for your family, refinancing your home to start a business—having reliable equity such as a paid off home will get you ready to begin the next chapter of your life with all of the resources that you need.

2. Pay less over time

Since most mortgage loans have 30-year amortizations, the payments will most likely be lower than a rent payment. This will also be building towards your equity, as opposed to the landlord's equity. Because of this, you will ultimately save a significant amount of cash as opposed to renting.

3. Long term savings

Begin a plan for retirement now. Everyone plans to retire at some point in their life. We all have goals in between now and then, whether it is to own a home, or several homes, to start a company, or to pay for an education. Choosing to buy a home instead of renting will open up income possibilities in the future, and ensure that you become debt-free upon retirement.

Mortgages are designed to meet a client’s specific needs and interest, and will help you to achieve the goal of owning a home of your own. Renting will result in monthly payments with no return, whereas buying a home will pay off now and in the future. Millennial buyers may be ready to search for their dream home sooner than they believe and should be encouraged to meet with a mortgage lender to begin this process.

Lease-to-own contracts (LTOs) and land contracts (LCs) are different legal ways to transfer occupancy of a property from an existing owner who does not want to occupy it to someone else who does, but who cannot qualify now for the financing required to purchase it outright. Both LTOs and LCs offer wannabee owners the right to occupy a house for a period during which they can improve their capacity to qualify for the financing they need to complete the deal.

Note: The LC designation includes what are called “contracts for deed” which are used in the same way. Detailed provisions of both vary from state to state.

The LTO Transaction

With an LTO, the new occupant becomes a tenant and the current owner becomes a landlord who offers the tenant an option to purchase the house within a specified period. The tenant will need a purchase mortgage when the time comes.

As an example, assume a house appraised for $100,000 that cannot be sold outright at that price but the price is acceptable as the option price under an LTO. The renter/buyer has the right to occupy the house with an option to buy anytime within 18 months for $100,000 in exchange for a non-refundable option fee of $1500 and monthly rent of $900 for 18 months. If the wannabe buyer cannot qualify for the mortgage required to exercise the option within the 18 months, her option lapses and she must vacate at the end of the period.

The LTO offers the wannabee homeowner an opportunity to bet on herself. To become a homeowner, she must either improve her credit score, or accumulate the funds required for a down payment on a purchase mortgage, or both.

The LTO offers the seller a chance to obtain a better price than is otherwise available. If it turns out that the buyer cannot complete the transaction, the seller retains the option fee and rent, and recovers the house, perhaps to offer it again to another wannabee owner. If the seller had a mortgage, it would not be affected by an LTO that fizzled.

Price changes that occur during the option period do not benefit the wannabee owner. If the house declines in market value, purchase at the option price becomes less attractive. If the house appreciates in value, purchase at the option price becomes more attractive, but the capacity to make the purchase will not increase. The maximum available mortgage amount will be based on the option price, not the current market value, so that the required down payment will not change.

The LC Transaction

With an LC, the new occupant purchases the property with financing provided by the seller, who becomes a lender. But legal title does not pass until the loan is paid off, which requires the new occupant to refinance.

As an example, under the LC, the wannabe buyer pays $100,000 for the house, including $1500 in cash as a down payment, with the seller providing a loan for $98,500. The monthly payment of $900 covers the principal and interest plus taxes and insurance, with the loan balance of $96,658 after 18 months due at that time. If the wannabe buyer cannot refinance, the owner does not transfer legal title and can take steps to have him evicted.

To wannabee owners, an important difference between LTO and LC deals is that completing the first requires a purchase mortgage while completing the second requires only a refinance of the mortgage granted by the seller. Closing costs are lower on a refinance, and the down payment required is smaller. The $1500 that went into the seller’s pocket as an option fee on the LTO became buyer equity on the LC.

Furthermore, since the equity required on the refinance is based on a current property appraisal, an increase in market value during the 18 months will reduce and could even eliminate the need for the buyer to come up with additional cash. In the example, a lender imposing a 10% equity requirement on refinances would refinance the entire $96,658 balance after 18 months if the market value of the house had risen to $107,500.

Mortgage quotes come with options that you may not be aware exist, but definitely need to understand if you want the best mortgage for your unique situation.

The terminology used by mortgage lenders to describe these options is probably foreign to most borrowers – par, above par and below par pricing.

These mortgage terms also come with more consumer friendly names – especially above par pricing and below par pricing. Consider par pricing in golfing terms – if you make a par you are even. You neither pay more or less for the mortgage rate quoted.

When your mortgage rate is above par it means the mortgage rate quoted is yielding additional funds to the lender. In the past that money typically went into a loan officer’s pocket, but those days are long gone.

Mortgage loan originators are paid a flat fee on every loan they originate. It does not and cannot vary based on the mortgage rate charged.

So, how does this above par and below par pricing work and how should you pick and choose when to use it?

Ins and Outs of Above Par (Lender Credit) and Below Par (Discount Points) Pricing

Discount points and lender credits give you options. They represent a tradeoff of out-of-pocket expense at closing or paying more/less on your monthly mortgage payment.

Discount points (below par), lower your interest rate in exchange for an upfront fee.

Lender credits (above par) lower your closing costs in exchange for a higher interest rate.

Points are listed on your Loan Estimate and on your Closing Disclosure on page 2, Section A.

By law, points listed on your Loan Estimate and on your Closing Disclosure must be connected to a discounted interest rate.

The exact amount that your interest rate is reduced depends on the specific lender, the type of mortgage loan and the current state of mortgage market rate pricing.

Sometimes you may get a big reduction in your mortgage rate for each point paid. Other times, the reduction is smaller.

Lender credits (above par pricing) are simply discount points in reverse. You pay a higher interest rate – usually – and the lender gives you money to offset your closing costs. Pay less at the closing table, but more each month. Simple right?

By law, above par pricing must be passed back to the borrower in the form of a lender credit. It also must be clearly disclosed on the loan estimate and closing disclosure forms that every borrower receives – usually multiple times from application to closing.

The same goes for discount points, they must be applied to obtain your mortgage rate and fully disclosed.

Ever heard the talking heads on the radio blabbing about a “no closing cost” refinance? That doesn’t exist, it always cost money to close a mortgage loan – purchase or refinance. Someone is absorbing those costs and it is typically the lender in the form of above par pricing – a lender credit – originating from a higher mortgage rate.

Regardless, it is important to remember what we mentioned earlier – that mortgage rate and discount points – or lender credits – do not affect loan officer compensation. Nobody is pulling the wool over your eyes, it all has to be clearly disclosed at application, when you lock your mortgage rate and prior to closing too.

Mortgage borrowers having to choose between the different types of mortgages face a puzzle, which may be
particularly perplexing today. Interest rates remain low by historical
standards, the spread between fixed and adjustable rates remains large, but
expectations are widespread that all rates will soon increase – unless the
current collapse of stock prices causes rates to drop again. The
challenge to borrowers who must make a type-of-mortgage decision in this
environment is also a challenge to anyone presumptuous enough to offer them advice.

My response to that challenge has been to develop decision rules that indicate the circumstances under which each of
the major mortgage types should be selected. I will illustrate with a
hypothetical mortgage of $405,000 on a $450,000 single-family home to a
high-credit score borrower at the competitive prices posted on my web site on
August 21. The interest rates cited are for loans carrying zero or close to
zero origination fees. The numbers used are designed to provide readers with a
feel for the magnitudes involved, but the decision rules are not dependent on
them.

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