I am finishing a series on LPMI loans. If you’ve missed any of them, here is a quick recap for you:
LPMI loans, or Lender Paid Mortgage Insurance, are loan programs that allow a borrower to not make a monthly mortgage insurance payment on the loan. The “catch” is the borrower agrees to a higher interest rate instead.
If deciding which one to do by going with the lowest payment, it is normally going to be the LPMI loan. That said, LPMI loans make less sense when making a larger down payment and/or having an average or below average credit score. So how to make the decision?
Answer this question – How long do you plan to stay in the home?
The shorter the time frame of staying in the home, the more it makes sense to go with the LPMI option. Why? It takes around 4 years for the monthly mortgage insurance to fall off when making a 15% down payment. Closer to 9 or so years when making a 5% down payment.
– If the plan is to stay in the home for only 5 years, then the LPMI loan would probably be the way to go.
– If the plan is to stay in the home for the next 10+ years, then the monthly mortgage insurance loan would probably be the way to go. Why? Once the monthly mortgage insurance payment falls off, the interest rate will be lower compared to the LPMI loan. When using the LPMI loan, you’ll always have the higher rate.
After completing this series, here are the combinations to consider when deciding between using the LPMI loan or a traditional loan with monthly mortgage insurance.
– Consider LPMI when the plan is to stay in the home for a shorter time period, you have excellent credit, and the down payment will be 5%.
– Consider a traditional loan with monthly mortgage insurance when staying in the home for a longer period of time, and/or you have average or below average credit, and/or making a larger down payment.
Clear as muddy water?
If unclear, no worries. That is why I am here. If buying a home in Georgia, contact me today. We can talk about the ins-and-outs of LPMI loans and see what works best for you.
Continuing a series on LPMI loans, or Lender Paid Mortgage Insurance. Last time I introduced LPMI loans. Today, I want to focus on two things to consider when deciding between using a conventional loan with monthly mortgage insurance OR using a LPMI loan.
#1. Credit – I bet you could have guessed this one! With a higher credit score, the impact to the interest rate is decreased. That said, the lower the credit score, the more the interest rate will be increased.
Remember how LPMI loans work – the borrower won’t pay a monthly PMI payment, but to do so, they are agreeing to a higher interest rate. How much higher? Let’s take a look at two examples of a $300,000 purchase price with 5% down. That gives us a loan amount of $285,000 on a 30 year fixed rate loan.
– 760+ Credit Score: the interest rate on the LPMI loan is 0.375% higher. While the mortgage payment is higher, when you factor is NOT making a monthly mortgage insurance payment, the LPMI loan is lower by about $65 per month.
– Under 720 Credit Score: this time, the net total payment is about $30 less going with the LPMI option. The drawback is the increase to the interest rate, which is 0.750% higher going with the LPMI loan.
The lower payment with the LPMI loan is great, but having the interest rate increased that month is tough to swallow (at least it is to me). The moral of the story is this – an LPMI loan may make more sense for those with excellent credit.
#2. Down Payment – the more money that is put down at the time of the purchase will lower the impact to the interest rate when using an LPMI loan. For example, let’s look at a 5% down payment versus a 15% down payment on our $300,000 purchase price.
– 5% down: it would take about 9 years for monthly PMI to fall off making the minimum monthly payment.
– 15% down: it would take a little over 4 years for monthly PMI to fall off the loan.
The borrower may have the lower monthly payment using an LPMI loan, but why go with the higher rate if the monthly PMI will fall off in only a few years. With an LPMI loan, you are stuck with a higher rate for the life of the loan. The monthly MI payment may result in a higher mortgage payment for a little while, but when the PMI falls off, you’ve got a lower monthly payment. The moral of the story is this – an LPMI loan makes more sense when making a smaller down payment.
How to decide? Tune in next time when we ask the question that helps to decide which option is best for you!
LPMI loans, or Lender Paid Mortgage Insurance, is a loan program that does not require a borrower to make monthly mortgage insurance payments regardless of the size of the down payment. A borrower can make a 3%, 5%, etc. down payment and not make monthly mortgage insurance payments.
Sound too good to go be true? Maybe. There is a catch. In exchange for not making a monthly mortgage insurance payment, the borrower agrees to a higher interest rate on the loan. The lender takes that higher interest rate and purchases a onetime up-front mortgage insurance premium at closing – thus Lender Paid mortgage insurance.
While the lender is technically paying the mortgage insurance, the borrower is really paying it through a higher rate. Does it make sense to use a LPMI loan?
If the goal is a lower payment, the answer is “yes.” When using an LPMI loan, the monthly payment will be lower than having a loan with a lower interest rate but paying monthly mortgage insurance.
Next time, I’ll discuss a couple of items to evaluate when considering a LPMI loan. In the meantime, if you’d like to know more about it, contact me today. I can help get you started on the path to home ownership.
In a recent post, I mentioned how buying a home using a conventional loan with a 3% down payment helps avoid ridiculously high mortgage insurance payments associated with FHA loans. What makes FHA mortgage insurance payments more expensive than conventional loans?
Due to the housing and foreclosure crisis, FHA continually increased their monthly mortgage insurance payments to help cover their losses from FHA insured homes that went into foreclosure. Prior to the crisis, the monthly mortgage insurance rate was 0.50% of the loan amount per year. After 5 straight years of increases, it is now at 1.35% of the loan amount per year.
Great. What does that mean?
Let’s take a look at some numbers comparing FHA mortgage insurance to a conventional loan with 5% down and also a conventional loan with 3% down.
FHA – on a $250,000 purchase price, the total loan amount for an FHA loan would be close to $245,500. If you take 1.35% of that loan amount, you get $3,313 for the year. Divide that out by 12 months, and the monthly mortgage insurance payment is about $276 per month.
Conventional 5% down – assuming the buyer’s credit score is 720+, the same $250,000 purchase price with 5% down would give us a monthly payment of $122 for mortgage insurance. The FHA loan is more than double that amount per month.
Conventional 3% down – again, assuming a 720+ credit score and a $250,000 purchase price with 3% down, the monthly mortgage insurance payment would be $222. That is about 25% less per month compared to an FHA loan.
The monthly mortgage insurance payments for conventional loans can be noticeably lower than FHA loans. I haven’t even got into the fact that all FHA loans come with an upfront mortgage insurance premium of 1.75% of the loan rolled into the loan amount (about $4,200 rolled into the loan amount on a $250,000 purchase price). Nor have I covered how, in most cases, FHA mortgage insurance is permanent.
I encourage my clients, when they qualify, to use a conventional loan to purchase a home because conventional mortgage insurance is typically lower per month, there is no upfront premium, and the mortgage insurance is not permanent. That said, sometimes an FHA loan is still the way to go.
Looking to buy a home in the state of Georgia but are unsure if you should use a conventional or FHA loan? Contact me today to get started. I’ll go through the pros and cons of each, and we’ll run the numbers to see which option makes the most sense for your specific situation.
Last time our videos focused on the monthly mortgage payment. Today, we will focus on something that could be part of a monthly mortgage payment – mortgage insurance. There are a lot of components that go into mortgage insurance. Watch the video to learn more about it!
To contact any of us at Dunwoody Mortgage Services, click here!
So you are looking to buy a home with as little down as possible. You have some savings, and would like to wait to save more money, but circumstances are speeding up the time frame on when you need to buy a home. Maybe you need a bigger home for your growing family. Perhaps you are moving into a new city for work. Regardless of the circumstances, you need to buy a home now.
Unless you qualify for a VA or USDA loan, you’ll need to make a small down payment. Then what about closing costs, prepaids, etc.? Let’s take a look at the minimum down payment and ways to cover the other costs of buying a home.
While the seller can give money toward paying a buyer’s closing costs and prepaid items (more on that in a moment), the seller cannot give any money toward the down payment. The down payment itself can be as little as a 3.5% down payment using an FHA loan, or 5% if using a conventional loan.
What if you don’t have the down payment today? One option could include borrowing money from retirement accounts. Most retirement accounts allow for you to borrow money without penalty to long as you are buying a home AND you pay the money back into the retirement account. Another option would be to get a gift from a relative/acceptable gift source for the loan program.
Using one of those options (or a combination of them) will take care of the down payment, now let’s focus on finding ways to pay the closing costs (costs associated with buying a home/getting a loan) and prepaids (insurance and property taxes on the home).
As mentioned earlier in this post, the seller can contribute money toward paying your closing costs and prepaid items. The exact amount depends on the purchase price and loan program. FHA loans allow the seller to contribute up to 6% of the purchase price toward closing costs and prepaids. Conventional loans allow 3% of the purchase price when making the minimum down payment.
Another option would be doing a no closing cost loan. Between these two options (seller paying money toward closing costs and prepaids AND doing a no closing cost loan), we can get closing cost and prepaids covered.
As you can see, there are several options available to help someone buy a home without having a lot of assets at the start of the loan program. The best option is to work to save money up prior to making the home purchase, but sometimes “life happens” and you buy a home sooner rather than later.
This is why you need to work with the professionals at Dunwoody Mortgage Services. We can use any one or combination of the options outlined in this post to help get you into your new home sooner rather than later. If you are looking to buy in Georgia, contact me today to get started. We can talk about options, go through the prequalification process, and get you ready to buy your next home!
I’ve often wondered why many people who talk with me about buying a home assume they need a 20% down payment. Since staring in the mortgage industry in 2007, I’ve always been able to offer a conventional loan with a 5% down payment to my clients. The only exception was a couple of months in early 2009 when the minimum down payment for conventional loans in Georgia was 10%.
From the sound of this CNN Money article published yesterday, it seems 5% down conventional loans are something new. The article says that several large banks are loosening the purse strings, offering loans with down payments that are as low as 5%.
What is frustrating about this article is that I can and have been able to offer conventional loans with as little as 5% down. Guess what? So have those same large banks. I don’t understand why media news and broadcast stories make it sound as if the only way to get a conventional loan is to come with a 20% down payment.
So we are all on the same page, here are some standard guidelines when it comes to the minimum down payment:
– Conventional Loan: you need a 5% down payment and a 620+ credit score. There is PMI on the loan, but the down payment is only 5%.
– Lender Paid PMI Conventional Loan: you can also qualify for this program with a 5% down payment and a 620+ credit score. There is no PMI monthly payment, but the interest rate is going to be higher than a 5% down conventional loan with monthly PMI payments.
– FHA loans: you need a 3.5% down payment. Most lenders prefer a 640+ credit score though a few will still do as low as 600. The monthly PMI payments are significantly higher each month for FHA loans.
Did you notice the credit score requirements listed above? From news reports, it sounds as if you must use an FHA loan if you have an average or below average credit score. That’s not true. Lenders will now approve a 5% down conventional loan with a lower credit score than what most lenders will allow for FHA loans.
In short – don’t believe everything you see on TV or read on the internet. Contact a mortgage professional to get accurate information for the home loan process.
When HARP first rolled out a couple of years ago, homeowners with private mortgage insurance would not qualify for the program. Some changes were made along the way that allowed private mortgage insurance (known as “PMI”) to be transferred to the new loan originated through HARP.
But not all PMI loans are created equal. What about homeowners who went with Lender Paid Mortgage Insurance instead of a borrower (monthly) paid PMI?
It actually depends on the company providing the mortgage insurance coverage. Some mortgage insurance companies are reviewing files and considering transferring the coverage to the new HARP loan. Other mortgage insurance companies are not transferring their mortgage insurance policies at all regardless of the type (borrower paid versus lender paid).
It is helpful to know who provides your mortgage insurance. You can find this out by looking in a couple of places. First, try your monthly mortgage statement. If nothing is mentioned there, try your HUD-1 (settlement statement) you got at closing. Last resort, pull out that LARGE stack of papers the attorney gave you from closing. One of the documents you signed would have been a mortgage insurance disclosure. That may also tell you who is providing your private mortgage insurance.
Again, there is no guarantee the mortgage insurance can be transferred. Knowing who is providing the coverage would allow me to see if any of the lenders I work with would be able to get the PMI transferred to your new HARP loan. Regardless if it is borrower or lender paid mortgage insurance, there may be a source.
UPDATE as of 12/20/2011 – Over the past week, several of the lenders I work with have said they cannot refinance a loan using HARP if it has LPMI. For now, it seems that if your loan has monthly paid PMI, we can look to transfer it to the new loan. If it has LPMI, the potential refinance using HARP is on hold.
“one of the most anticipated sequels of 2011” – says Clay Jeffreys of The Mortgage Blog
“it’s about time” – says a frustrated homeowner
* Note the program is still called “HARP,” but I’m referring to it as “HARP 2” for comedic relief and clarity’s sake
Unlike some movie sequels that get filmed (really, we needed a Spy Kids 4?!?), the Homes Affordable Refinance Program, known as HARP, needed a sequel. Why? Just like Rebook realized they needed to make more “office linebacker” commercials after its popularity from a past Superbowl, HARP needed some revisions to be more readily available to homeowners so more people can enjoy it!
Reebok knew what they were doing!
The original intent of HARP was to allow borrowers who were somewhat underwater refinance their mortgage into a lower rate. On paper, it sounded great. Sadly, unforeseen issues arose that didn’t allow the program to be as effective as the government hoped it would be.
What changes should one expect with the sequel “HARP 2 – The Mulligan”? There are a few major changes, but good portions of the HARP program remain the same. You can read about the program from my recent posts here (a recent “question and answer” session) and here (an overview when the program was first announced). Changes include:
No maximum loan to value limit. Once this part begins (to start in 2012), homeowners can be 200 or 300% underwater and still refinance to a loan without paying mortgage insurance if there is not mortgage insurance on the current loan.
Up to 125% loan to value ratio to be allowed with any mortgage company. This should get underway starting in December. Presently only your current mortgage servicer was allowed to go that high, which limited consumer’s ability to shop for the best interest rate.
Homeowners can qualify even if they are currently unemployed AND no income verification is required if the previous loan was a stated income loan as long as…
Homeowners have no late mortgage payments in the last 6 months, and only one late mortgage payment of 30 days in the last 7-12 months. In other words, if you are paying on time, you could refinance without income verification.
Private Mortgage Insurance (PMI) to be transferred to the new loan as long as it is not Lender-Paid PMI
As long as Fannie Mae or Freddie Mac own your mortgage, you got the mortgage prior to the end of February 2009, and you are current with the payments, there is a good chance you’ll qualify for new and improved HARP 2 loan program.
Some questions you may be thinking:
How do I know if Fannie Mae or Freddie Mac own my mortgage? Great question! You can use their online lookup tools. Use this link for Fannie Mae. Try this link for Freddie Mac.
How do I get started? If the property (primary residence, vacation home or investment property) is in the state of Georgia, I can help you get started. Contact me and we will take it from there.
Remember HARP 2 is not here yet, but it is coming soon. Refinance applications for the updated program can start in December, but some parts may not be available until 2012. Stay tuned to The Mortgage Blog for updates on all aspects HARP 2 availability in the coming weeks!
Clay Jeffreys is a Mortgage Consultant with Dunwoody Mortgage Services and a writer for “the Mortgage Blog.” If you would like to be a guest writer for "the Mortgage Blog" please contact Clay for details.
busino
clayjeffreys
Rodney
vanpurser
The Mortgage Blog 