Posts Tagged ‘mortgage insurance premium’

Is It Time to Refinance An FHA Mortgage?

October 11, 2019

As discussed previously, using an FHA loan to buy a home makes sense for home buyers with relatively low credit scores and limited down payment funds. FHA loans offer very attractive pricing for these home buyers.

Interest rates have now fallen to their lowest level in three years, so it may be time for current FHA mortgage holders to consider a conventional mortgage refinance. The interest rate savings may not be huge, but changing from FHA mortgage insurance to private mortgage insurance could bring significant financial benefits.

I’m working with a couple now (we’ll call them Jack and Diane) who bought their home in 2017.  At that time, their qualifying credit score was in the mid-600’s and they had just enough cash for the FHA minimum down payment.  This was an ideal scenario for an FHA mortgage.

Fast forward to 2019 – their credit scores have increased and home appreciation in their neighborhood has given them more equity.  A conventional loan now makes sense for their updated situation.  They can refinance to a new interest rate that is just 0.25% less than their current rate.  Normally such a small monthly savings, by itself, does not justify the cost of refinancing.

In addition to the interest rate savings, they will also save money every month with lower mortgage insurance payments.  Switching from their FHA loan to a conventional loan will lower the mortgage insurance monthly premiums by about $120.  Their total monthly savings equal $160, and their refinance has a break-even point of just over two years.  Considering the interest rate savings plus the mortgage insurance savings makes their refinance worthwhile.

An added benefit is that their new private mortgage insurance will cancel in a few years (unlike the FHA insurance which is permanent), increasing their monthly savings to about $200. So, Jack and Diane will realize this bonus savings in just a few years.

Ultimately, home buyers who used an FHA loan two or three years ago may reap big rewards from a conventional refinance now, assuming their property value has increased.

Ron moved into your neighborhood in the last three years or so. At the neighborhood Halloween party, ask Ron if he has heard of an FHA mortgage. If he replies, “Yes, that’s the type of loan I have,” ask him if he would like to lower his monthly payment.  Then connect Ron with me.  We will quickly determine whether moving to a conventional mortgage can help Ron financially.

Millennial Home Ownership Survey

September 19, 2019

There are some interesting facts and observations in an August article documenting survey results from Millennial home buyers.  Here’s a link to the full study from lendedu.com.  1,000 people aged 23 to 38 participated in the survey.  Here are some survey results:

  • 58% of respondents say they own their own home.
  • 83% of these home owners obtained a mortgage to buy their home.
  • 75% of these mortgage holders obtained a FHA loan.
  • 16% is the average down payment percentage for the survey respondents.

To me, it is very surprising to me that such a high percentage of these home buyers used the FHA program, especially given the relatively high down payment percentage reported.  What I also find surprising is how the author treats FHA loans vis a vis the private mortgage insurance component of conventional mortgages.

Let’s look at the basics of FHA mortgage insurance (“MI”) vs. conventional (private) mortgage insurance (“PMI”).  FHA charges a 1.75% up-front MI.  On a $300,000 loan, that charge is $5,250.  Assuming a Millennial average 16% down payment, FHA charges a 0.80% monthly MI premium, which equals $200 per month.  And for this loan, the borrower must pay the monthly MI for 11 years.

For PMI on conventional loans, there is no up-front fee.  So our $300,000 mortgage holder is better off by $5,250 to start.  The PMI premium is based on the combination of down payment and the borrower’s credit score.  Let’s assume that a Millennial buyer (we’ll call her “Anna”) has a 680 credit score.  I calculate Anna’s monthly PMI premium at 0.26% or $65 per month.  In addition, the conventional loan PMI will cancel sooner than FHA MI, so Anna will pay conventional loan PMI for less than half the time she would pay FHA loan MI.

Summarizing this example, Anna with a 680 credit score would reap the following mortgage insurance benefits of choosing a conventional loan vs. FHA: (1) Anna saves $5,250 by not having the up-front FHA MI premium rolled into the loan amount; (2) Anna saves $135 per month with the lower PMI rate vs. the FHA MI rate; and (3) Anna stops making mortgage insurance payments way sooner.  And Anna’s PMI payment will be even lower if her credit score is in the 700’s.  From a mortgage insurance perspective, the conventional loan seems like a much better deal.

The author praises the use of FHA mortgages, then later makes the following statements about private mortgage insurance:

  • PMI should be avoided as it will usually cost the homeowner between 0.5% to 1% of the full mortgage amount….”
  • “…it is not great that so many are also paying for PMI as a result of less-than-optimal down payments…”

Such blanket negative statements about PMI concern me.  In our example, and many examples where the borrower has a strong credit score and can make a 10% or more down payment, the numbers often favor conventional loans.  FHA loans are often better when the borrower’s credit score is low or the borrower can only make a down payment of 10% or less.

The key lesson here is to consult a professional mortgage lender (I suggest that this guy for Georgia home buyers) to run the numbers for both FHA and conventional loans.  Then choose the best option given your circumstances.

Which Type of Mortgage To Use – Scenario 1

August 13, 2019

Now that everyone understands the basics of FHA and conventional loans, let’s do a buyer comparison. Both Jack and Diane want to purchase a $300,000 home. They both have $11,000 (3.7%) for the down payment and qualifying credit scores of 680 for Jack and 795 for Diane.

With Jack’s 680 credit score, his monthly payment for a conventional loan (principal, interest, and mortgage insurance “MI”) would be $1,820.82.  For a FHA loan, his payment would be $1,563.19. There’s no comparison. For Jack, the better deal is the FHA mortgage, even though it has the draw backs of the up-front mortgage insurance and the permanent monthly mortgage insurance payment.

With Diane’s 795 credit score, her monthly payment for a conventional loan would only be $1,582.61. Her FHA loan payment would be $1,542.47.  In this case, Diane is also better off, at least initially, with the FHA loan. One thing to keep in mind is the MI premium. If Diane chooses the FHA loan, that premium is permanent (assuming Congress does not change the law). If she chooses the conventional loan, the insurance will eventually be cancelled, dropping her payment to $1,442. The key question for Diane is, “How long will you stay in the home?” If less than 5 years, Diane’s best bet is the FHA loan. If longer than 5 years, Diane may want to consider the conventional loan.

Notice the FHA payments for these examples. They differ by only about $21 even though the credit scores are drastically different (680 versus 795). This shows why FHA is better for those making a purchase with lower credit scores. The buyer doesn’t see as steep of an increase in their payment.

In the next blog post, we will make the same comparison with a 10% down payment.

Does your friend Scott talk about buying a house?  Does he understand which loan program is best for him?  If not, have Scott contact me. We Dunwoody Mortgage professionals understand the details of these mortgage programs, and we coach our buyers to make the best decision given their circumstances.  Often, with a slight change to their home purchase situation (change of down payment, paying down a credit card balance, etc.), we can help our clients save money with a better interest rate or a lower mortgage insurance cost.  Home buyers should consider all options before buying, and Dunwoody Mortgage offers the service and knowledge to help home buyers make the best decision possible.

Types of Mortgages – Conventional

July 30, 2019

Now let’s take a look at conventional mortgage details.  (Click here to review FHA loan details.  And here is a link to the Home Ready program changes.)

In general, conventional loans are less forgiving of credit issues than are FHA loans.  Conventional loans require longer wait times after derogatory credit events like foreclosure or bankruptcy.  And the borrower’s credit score has a much greater impact on conventional loan pricing versus FHA loans.  The lower one’s credit score, the higher the interest rate.  In some cases, a credit score 100 points lower could cause the borrower’s interest rate to increase by almost one percentage point.

Ultimately, this makes conventional mortgages less attractive to borrowers with lower credit scores and more attractive to those with higher credit scores.

Conventional loans do not require up-front mortgage insurance, but private mortgage insurance (“PMI”) is required for down payments less than 20%.  PMI rates vary based on the borrower’s credit score and down payment.  For the same loan amount, the monthly PMI will be dramatically different for a 690 credit score borrower making a 5% down payment vs. a 780 credit score borrower making a 15% down payment.  PMI is not permanent.  It automatically terminates when the borrower’s loan balance reaches 78% of the original contract price or appraised value (whichever is lower).  And, in certain circumstances, the borrower can request PMI cancellation prior to reaching the 78% threshold.

Borrowers can obtain a conventional loan with a minimum 3% down payment.  This often only makes sense when the borrower’s credit score is 720 or higher.  With a lower score, the PMI cost for a 3% down loan can get pretty expensive.  We often recommend that conventional buyers make a 5% or more down payment to keep PMI costs lower.

Another advantage of conventional loans is the maximum loan amount.  While FHA caps out at a purchase price of around $390,000 using the minimum down payment, conventional loans can go higher.  How much higher?  How about a $500,000 purchase price with a 3% down payment.  That is about 25% higher than the FHA maximum.

In the next posts, we will compare some hypothetical home buyer scenarios to determine which loan is best – conventional or FHA.  Do you know someone who wants to buy a Georgia home?  Please refer them to me.   We Dunwoody Mortgage professionals ask important questions to determine if we can help our clients make slight changes (down payment amount, paying down a credit card balance, etc.) that help them save money with a better interest rate and / or lower PMI premium.  We work hard to deliver excellent service and pricing to our customers, and our consistently positive reviews show our clients are pleased with our work.

 

Types of Mortgages – FHA

July 23, 2019

Given recent mortgage program changes, now is a good time to review the pros and cons of the major loan programs and when borrower circumstances favor one specific loan program.  In the last few years, many of our clients have used the conventional Home Ready program.   Without Home Ready, many of these buyers would have used FHA loans.  Given the Home Ready changes, we expect more future buyers to use FHA loans.

So let’s talk about FHA loans!

  • In the metro-Atlanta area, buyers can purchase homes up to about $390,000 using a minimum down payment (3.5%) FHA loan.  That is a lot of home!
  • Relative to conventional mortgages, FHA loans are generally more forgiving of credit “issues.”  This means lower credit score borrowers will most likely get a better FHA interest rate versus a conventional loan.
  • FHA allows for lower credit scores and shorter wait times following derogatory credit events, such as foreclosure or bankruptcy.  Borrowers typically need a 620 score to qualify.  Depending on other borrower details, Dunwoody Mortgage may be able to close loans where the borrower’s credit score is as low as 580.

Both FHA and conventional loans require monthly mortgage insurance “MI” for down payments less than 20%.  For FHA, the monthly premium is a flat 0.85% of the loan amount.  Conventional loans determine the premium based on the borrower’s credit score and down payment.  FHA loans also have an up-front mortgage insurance premium.  FHA monthly MI is permanent if the down payment is less than 10%.  Note that Congress is now considering a bill to automatically cancel FHA MI similar to how conventional loans cancel the insurance.  More to come on this story.

In the next post, we will review conventional loan details.  For now, if you know someone looking to buy a Georgia home, please refer them to me.  We Dunwoody Mortgage professionals understand the key loan program details and we coach our buyers to make the best decision given their circumstances.  We can help our clients find ways to lower interest and mortgage insurance costs.  We have a strong record full of very positive customer reviews.


Should I Refinance Now?

June 20, 2019

As recently reported in The Mortgage Blog, mortgage interest rates have dropped to their lowest level in over two years.  The last time rates were consistently this low was just before the 2016 Presidential election.  For people who purchased homes since then, it may make sense to refinance now.  So how do you decide if a refinance is right for you?

I read one article from a major think tank stating you should refinance for a rate that is a specific amount lower than your current rate.  I believe that is a bit simplistic and you should crunch numbers in more detail.  I recommend comparing the financial benefits against the cost of refinancing – the total amount you can save each month versus the refinance cost.

With a rate / term refi, you will save by lowering your monthly interest payments and, possibly, by lowering or eliminating private mortgage insurance (PMI) payments.  I recommend you focus on the dollar savings.  A 0.5% interest rate change on a $100,000 loan will save you much less per month than the same interest rate change on a $400,000 mortgage.  Eliminating or reducing PMI payments can provide significantly lower monthly payments.  To eliminate PMI, you must must have 20% equity.  Perhaps your home’s value has increased since you bought it.  You can capture this higher value as equity in the new loan using a new appraisal value.  If the appraisal shows you have greater equity, even if it’s less than 20%, you may see your PMI payment reduced, perhaps substantially.

How do I analyze the savings?  I estimate a new monthly payment based on the lower interest rate and potential PMI changes and compare this rate versus their current payment.  Then I divide the refi closing cost by the monthly savings to get a “break even” point.  If the monthly savings break even on the closing costs in three years or less, I typically recommend that the client pursue the refinance.  Why three years?  It seems most people have a general idea of their plans for the next three years or so.  Anything further than that becomes a little murkier.  I’m currently working with a client who has a $335,000 loan.  I estimate a refinance will save her $150 per month and will “break even” in about 22 months.  That seems like a wise financial move to me.

 

Another option to consider is a cash out refinance.  Is there a home project you want to do?  Perhaps a kitchen or bathroom renovation?  I have clients using their home equity and lower interest rates to take cash out for a project, and still have the same payment (or even a better payment) than they have now.

Do you know someone who bought a Georgia home in 2017 or 2018?  Ask them what they would do with an extra $100 per month.  Then refer them to me.  I’ll run the numbers to determine whether refinancing is a wise move.

 

PMI vs MIP vs MPI… What is the difference?

May 17, 2017

Lots of acronyms there. What do they all mean?

Many people are familiar with the term “PMI” or Private Mortgage Insurance. This is insurance the borrower pays on behalf of the lender in case of a mortgage default. The insurance protects the lender and becomes a requirement when purchasing a home with less than a 20% down payment (or refinancing with less than 20% equity in the home).

MIP stands for Mortgage Insurance Premium and is completely the same thing as PMI, but that is what mortgage insurance is called on FHA loans.

So what is MPI? That stands for Mortgage Protection Insurance. When buying or refinancing a home, the home owner will get plenty of these offers in the mail in the weeks/months after buying a home. Why? Companies pay people to search through newly recorded deeds at the county. This is legal since the deed is a matter of public record. With the deed information, a company knows your name, your new home address, and who did your loan. The offers for Mortgage Protection Insurance will come regularly in the mail, and these companies make it look like the letter is from your mortgage company. They can be sneaky with these letters.

What does MPI do? If you choose this option, MPI will pay the loan balance off for a borrower in the event of their death. Sounds good, but let’s dig a little deeper. The premiums for this insurance are typically significantly higher thank those for life insurance as they require minimal to no medical examination or health screening. Anyone in any health condition can get this insurance by paying the monthly premiums. The other downside is that as mortgage payments are made, the principal balance of their loan reduces. This means the payout in the event of the borrower’s death reduces… in other words, the premiums stay the same, but the death benefit decreases every month.

MPI is a fantastic option for someone who cannot, for whatever reason, qualify for term life insurance. If you can get term life insurance, it is the better way to go. Typically, people can get more coverage that doesn’t diminish each month for a lower monthly premium.

Just bought your first home and don’t have life insurance? Or maybe you’ve owned your home for a few years, but your family has grown since you last looked at your life insurance coverage. Regardless of your need, my friends at the Sheldon Baker Group can assist you in getting free quotes from the top carriers in the life insurance industry. You can check out the Sheldon Baker Group life insurance page here. You can also call 678-793-2322 or email to sheldon@sheldonbakergroup.com.

Whether you use my friends at the Sheldon Baker Group or someone else, life insurance is important as you own a home and/or have a growing family. Use the MPI offers in the mail as a reminder to evaluate your coverage.

 

Geographic Income Limits for Home Ready Program

May 1, 2017


One potentially limiting aspect of the Home Ready program is that income limits are specified by census tract.  (Notice I said “potentially.”  We will get back to that point very soon.)  To qualify for the program, the borrower’s income must be less than or equal to the income limit set for the geographic area of the subject property.  Fannie Mae specifies and publishes the geographic income limits as part of the program.  Many areas in Metro Atlanta have an annual income cap of $67,200, but there are many other areas that do not have an income limit.  Now back to the word “potentially.”  If the home you want to buy lies in a no-income-limit area, you could make a million dollars per year or even per month and still qualify for a Home Ready loan for that house.

Two key points to remember here:  First of all, the income limits are based the subject property’s location, so you can have varying income limits in different parts of the same county.  In fact, the eligibility maps go down to the street level, which means that houses on one side of a street could carry a $67,200 income limit and houses on the other side of the same street could have no income limit.  Secondly, the income limits apply only to borrowers on the loan.  If two employed people plan to live in the home, but only one of you is on the loan, then the other occupant’s income does not count toward the income limit.  Of course that means that the sole borrower must qualify for the loan using his or her income only.   

So how can you determine whether you qualify for the Home Ready program’s low down payment / low-interest rate / low mortgage insurance benefits?  You can call me at Dunwoody Mortgage!!  We will first discuss your income and the geographic area where you want to buy.  I can look up the area online and determine whether your income qualifies for Home Ready in that area.  If you meet the geographic income limits, we will complete your loan application, pull your credit report, and run your application through our Automated Underwriting System (“AUS”).  The AUS findings will then determine if you do qualify for Home Ready’s great benefits. 

Buying a house in Georgia and curious whether you can obtain a Home Ready loan?  Give me a call and we will review Home Ready and your other loan options.  Don’t think you will qualify?  We at Dunwoody Mortgage have secured loans for many customers who initially thought they would not qualify.  Don’t assume you cannot win loan approval!  Call me and let’s discuss your situation.  We might just surprise you!! 

 

 

 

3% Down and a Great Interest Rate!

April 24, 2017

National mortgage giant Fannie Mae offers the Home Ready conventional loan program that can be very helpful for qualifying home buyers.  Home Ready enables qualified buyers to obtain a mortgage with a 3% down payment, so it’s great for people with limited available cash.  In addition, when the buyer has an average credit score, Home Ready provides lower interest rates and mortgage insurance premiums relative to standard conventional loans.

One important point is that this program is NOT limited to first time home buyers.  If you have owned a home before or if you have an ownership interest in another property, you may still qualify for a new Home Ready loan, as long as you plan to occupy the new home as your primary residence. 

Home Ready requires that at least one of the home buyers complete an online home buyer education course.  This course costs $75 and takes about 4 to 6 hours to complete.  The course topics include:

  • Home affordability and budgeting
  • Credit ratings and credit improvement
  • Real estate agent selection
  • Mortgages
  • Offer letters
  • Home inspections
  • The closing process

The prospective home buyer will receive a certificate of completion after passing a final quiz and submitting a feedback survey.   Passing the quiz requires a score of 80%, and the buyer receives three attempts to pass the quiz.  If the buyer does not pass the quiz in three attempts, an additional approximately 30 minute telephone educational review session is required.   After obtaining the certificate of completion, the buyer should send a copy to his / her selected lender.

Here are a couple of additional program benefits:

  • Non-occupant borrowers are permitted.
  • Non-borrower household income from a family member (parents or siblings, for example) can be used to support a higher debt to income ratio than the borrower can obtain alone.

Future posts will cover Home Ready’s geographic income limits, and we will give an example scenario to highlight the program benefits.  But keep this in mind for now, if you want to buy a home in Georgia, but your credit score is less than great and you don’t have much available cash for a down payment, Home Ready could be the program that makes home ownership a reality for you.  Call me to discuss Home Ready and other options.  Or if you have a friend or family member who could benefit from Home Ready, forward this blog post to them.  We at Dunwoody Mortgage love to make home ownership a reality for everyone, and it’s especially fun for people who initially think they can’t qualify!

 

FHA Mortgage Insurance

December 16, 2014

blog-author-clayjeffreys3

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.

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