Real Estate

Regarding the second point: By not raising the loan limits they fail in one of the 11 ways they can help. I believe they will fail in almost all, but let us have hope. To be specific as to why I support this: FHA is not a government gimme. It is a government guarantee the mortgage will be paid or the lender compensated for losses. The program pays positive cash flow to the government in that there is a type of mortgage insurance fee charged the borrower. It is reasonable and more than pays for the reimbursements made to the lenders that suffer a default.

In Episode 22, I spoke about private mortgage insurance or PMI, and how it’s tax deductible for homes purchased in 2007. Since that episode, some of you have emailed me asking how you can get rid of PMI.

At the end of 2006, with the passing of its omnibus tax bill, Congress made private mortgage insurance for middle-income home buyers tax deductible in 2007. Private mortgage insurance, or PMI, is required when a homebuyer puts down less than 20% and protects the lender in the event of foreclosure.

What is happening here is the selling out of our citizens to benefit the bottom line of our nation’s financial systems. It is not unheard of for closing costs to be five or ten thousand dollars to simply re-write a thirty year mortgage. All of the closing costs are profit to the lender and it is awfully nice of them to roll them charges into your payment. Then you get hit with the private mortgage insurance that protects the bank but not you. Isn’t it nice that you pay for the bank’s insurance on your loan if you do not have 80% equity in your home? If you lose your home, legally you are still responsible for the loan. Nothing short of bankruptcy will cover your butt and even still, it can go the distance through collections.

Tip #3: Consider a second loan to avoid paying PMI. This can be tricky because you want to make sure the second loan cost you less than the mortgage insurance (obvious, but it has to be said). Optimally this will be a second loan that you can repay early, avoiding most of the interest payments. Check with your mortgage broker or banker to see if this option may be right for you.

Piggyback loans are the new-wave method of dealing with a down payment of less than 20 percent. When you use a piggyback, you get two home loans: a primary loan for 80 percent of the house’s value and a second mortgage for the rest of the money you need. With a 5 percent down payment, you would get what’s called an 80-15-5 mortgage: an 80 percent loan, a 15 percent piggyback and the 5 percent down payment. Getting a piggyback eliminates the need for mortgage insurance.

But with short-term interest rates now sharply higher — currently above 8 percent — piggyback loans are less appealing. Now, there are signs that some borrowers are giving traditional private mortgage insurance a second look.

- 5, maybe 6, or was it 7….the number of blood tests that were drawn from my arm for mortgage insurance, life insurance, doctor appts…I lost count and slowly am losing the nauseau the accompanies me and needles

Many buyers in recent years have stretched the limits of affordability, and have bypassed the traditional 20% down model. But make a smaller down payment, and most lenders will require you to have private mortgage insurance (PMI), which adds a minimum 0.5% of the loan amount to your mortgage payments, about $1,000 more a year on a $200,000 principal.

Zero down loans replaced VA and FHA for the most part. High rates on the second mortgages replaced PMI. Ten years ago a person might put 5% down and take out a 95% first mortgage and a lower rate, but they had to pay “Private Mortgage Inurance” on the top 15% of the LTV. The PMI amount was not tax deductible. The payment on the second at the higher rate was lower than the loan plus PMI payment and fully tax deductible. A conventional loan with a high rate second may “look” bad, but actually the numbers usually work better than a regular loan with PMI (the old fashioned way) or a 3% down FHA with an up front plus monthly MIP (Mortgage Insurance Premium).

All loans have fees associated with them. There are home appraisals, paperwork fees, mortgage insurance fees, and additional “points” added to the cost of the loan. In general, the costs of taking out a reverse mortgage are higher than those associated with a traditional mortgage. There are several reasons for this, including the fact that the time period for receiving repayment of the loan is indefinite, typically depending on how long the borrower lives. This uncertainty is added into the loan in the form of additional fees.

In the Washington Post, Michael Grunwald has an article on how issues of affordable housing are being increasingly felt in the suburbs. One of the advantages of post-World War Two suburbanization has been a marked increase in relatively affordable housing–albeit highly subsidized by the federal government. As scholars such as Kenneth Jackson have argued, federal government policies related to mortgage insurance, highway construction, and various tax deductions have been historicaly skewed towards suburban development at the expense of inner-city investment.

If you me a predictable monthly income and feel reasonably certain that your job is secure, you may want to consider putting down as much as 20%. It will certainly bring you smaller monthly payments, instant equity, an investment in that neighborhood’s growth, and you’ll avoid paying mortgage insurance (PMI).

Whilst I was there I got talking to the mortgage consultant. Seems that in this country there are 100% no deposit mortgages, though the interest rate is higher for these. For a 5% deposit, the interest rate is reduced or for the best interest rate, a 10% deposit. Beats Australia where its 10% minimum and you still have to pay for someone elses risk i.e. mortgage insurance.

I just gave our loan officer the go ahead on the mortgage for our house, so the first stressful thing is out of the way for me, at least for a day or two. Hopefully I won’t be second guessing myself on it. He gave us what seemed to be the best combination of payment/interest rate/closing costs and a loan program/process that I was sure I completely understood. At this point in our lives my two most important concerns were the monthly payment and the closing costs cause things are going to be a little tight on both of those. Things like whether we have to pay mortgage insurance, etc., were of high but slightly secondary importance. Next time around when we have some equity in our house and hopefully a more liquid situation in general I’ll spend more time finagling to get the very best deal.

Considering that Governor Doyle hauled in oil executives into a public hearing to lambaste them for their “obscene” profit of less than 10%, I will assume that MGIC will be similarly taken to task by Governor Doyle for their healthy profits.

At a Risk Index value of 147, we're only about half as risky as the average top-50 metro, according to the latest figures (PDF file) from PMI Mortgage Insurance Co.

Anyway, the PMI Group, which collects real estate data and makes risk assessments of real estate markets is out with their latest (quarterly?) report, ranking US cities most likely to experience a drop in housing prices.

So, at tax time, who declares the kid as a dependent? Who deducts the mortgage insurance? Who deducts charitable donations?

Today’s lofty prices can mean saving tens of thousands of dollars more for a down payment than in the past. But, it’s still a dream of many young adults to buy a first home.

If you put less than 20 percent down on a home mortgage, lenders often require you to have Private Mortgage Insurance (PMI). PMI protects the lender if you default on the loan. The Homeowners Protection Act of 1998 - which became effective in 1999 - establishes rules for automatic termination and borrower cancellation of PMI on home mortgages. These protections apply to certain home mortgages signed on or after July 29, 1999 for the purchase, initial construction, or refinance of a single-family home. These protections do not apply to government-insured FHA or VA loans or to loans with lender-paid PMI.

I totally disagreed with Mr. Bach’s suggestions that everyone should buy a home. He quoted a study that showed the homeowners have more than 30 times the net worth of renters. So, are homeowners wealthy because they own a home or do they own a home because they are wealthy? I doubt there is a causal relationship between the two. At any rate, it is a bit irresponsible to suggest that someone in a lot of credit card debt and very little in savings (Mr. Bach’s primary audience), buy a home with nothing down, mortgage themselves to the hilt, pay a premium on prevailing interest rates and pay the maximum private mortgage insurance at a time when real estate prices are expected to soften.

Mortgage insurance protects the mortgage lender against financial loss if a homeowner stops making mortgage payments. Lenders usually require insurance on low down payment loans for protection in the event that the homeowner fails to make his or her payments. When a homeowner does not make mortgage payments, a default occurs and the home goes into foreclosure. Both the homeowner and the mortgage insurer lose in a foreclosure. The homeowner loses the house and all of the money put into it. The mortgage insurer will then have to pay the lender’s claim on the defaulted loan.

The front ratio is the percentage of your monthly gross income (before taxes) that is used to pay your housing costs, including principal, interest, taxes, insurance, mortgage insurance (when applicable) and homeowners association fees (when applicable). The back ratio is the same thing, only it also includes your monthly consumer debt. Consumer debt can be car payments, credit card debt, installment loans, and similar related expenses. Auto or life insurance is not considered a debt.

If you are buying a home, know the home’s price and how much you plan on putting down. Most mortgage lenders require at least 10% for people with poor credit, but 20% down will help you avoid private mortgage insurance, saving you hundreds a year.

All loans have fees associated with them. There are home appraisals, paperwork fees, mortgage insurance fees, and additional "points" added to the cost of the loan. In general, the costs of taking out a reverse mortgage are higher than those associated with a traditional mortgage. There are several reasons for this, including the fact that the time period for receiving repayment of the loan is indefinite, typically depending on how long the borrower lives. This uncertainty is added into the loan in the form of additional fees.

Two mortgage insurance premiums are collected to pay for HECM: an up front premium (2 percent of the home’s value), which can be financed by the lender, and a monthly premium (which equals 0.5 percent per year of the mortgage balance). The lender’s loan origination charge can vary, but only up to $1,800 in such charges may be financed by HECM. Borrowers may be charged appraisal and inspection fees set by HUD; these charges can also be financed.

1. What are the terms? This will include interest rates and the length of the loan. Some lenders may require you to carry private mortgage insurance or to pay your mortgage through ACH deposit. Get the terms in writing, so that you can compare them with other lenders.

• Mortgage insurance: Just as bad. "On average, mortgage insurance costs three times more than ordinary term life with the same amount of benefits," Tyagi says.

If you are not putting a downpayment worth at least 20% of the total value (i.e. sale price) of the home, then lenders will require you to take out something called “PMI” (Private Mortgage Insurance). So if you’re buying a $200,000 home, you must put down at least $40,000, or you will be forced to take out PMI.

Calculate and graph your mortgage payment with and without mortgage insurance, real estate taxes, and property insurance.

The major practical impact will be the change in risk-weighting for loans and the point at which mortgage insurance is required.

"Earnings in our mortgage insurance business were particularly favorable, primarily related to lower than anticipated domestic delinquencies and favorable foreign exchange," said Michael D. Fraizer, chairman and chief executive, in a statement.

Kelly includes an in-depth question and answer interview with John Weicher, assistant secretary of the Department of Housing and Urban Development, who has responsibility for FHA home mortgages, including FHA reverse mortgages. The interview includes the best explanation I've seen of why FHA reverse mortgages, which comprise 90 percent of reverse mortgages, require mortgage insurance for the actual lender.

Did you know there is actually two types of mortgage insurance, and it pays to understand the difference between them…

First there is Mortgage Protection Insurance. This is what most people mean when they talk about mortgage insurance. Mortgage protection insurance is what you pay independantly or possibly as part of your monthly repayments, and it protects you personally. If you die or are permanently incapacitated it will payout your mortgage. Or if you temprarily lose your income it will cover your repayments (subject to various coniditions of course).

The other type of mortgage insurance is Mortgage Indemnity Insurance. This is insurance taken out by the lender (not you), although you will be paying for it either directly or indirectly. Mortgage indemnity insurance protects the lender if you are not able to pay out your loan and they then suffer a loss on sale of the mortgaged home. The insurance covers their loss.

The thing about mortgage indemnity insurance is that the insurance company will then come after you to recover the loss they had to cover, so don’t rely on it to cover your backside should things go pear shaped. Mortgage indemnity insurance is also known as Lender’s Mortgage Insurance.

Based on PMI's Risk Index model, as of January 2005, the average risk value of the 50 largest Metropolitan Statistical Areas (MSAs) is 161. This implies that on average, there exists a 16.1 percent probability of an overall house price decline, as measured within the next two years and across the 50 largest housing markets.

The winter 2005 average risk value decreased sequentially, quarter-over-quarter, by 13.4 percent. As of autumn 2004, PMI Risk Index data showed that the average risk value of the 50 largest MSAs was 186, which implied an 18.6 percent probability of an overall house price decline, measured within the next two years and across the 50 largest housing markets.

Analysts at PMI have attributed the average decrease to improving nationwide economic conditions indicated by generally lower regional unemployment rates and increasing (or less negative) job creation. Eight of the nine MSAs ranked at the top of PMI's Risk Index, but did experience a substantial increase in risk. For these markets, another quarter of record home price appreciation has further dented home affordability even at mortgage rates close to historic lows. As affordability for these MSAs drifts lower, this signals a further misalignment of home prices with long-term economic fundamentals causing the probability of a two-year price decline to escalate.

According to PMI Mortgage Insurance,

Of the country’s 50 biggest cities, homeowners in San Jose stand the greatest chance of seeing their homes plunge in value . . . San Jose, Oakland, and San Francisco are three of the top five MSAs at the top of the risk index list.

The housing bubble in California may finally be ending. We Americans are spending every dime we come across, so much so that our savings rate this year may be the lowest since the Great Depression. With all these adjustable-rate mortgages, housing costs are going to rise in the coming years. While nominal household incomes in some California markets are up a nice 6-7% over 2003, they’re stagnant (and thus in real terms, they’re falling) in other housing-bubble cities like San Jose, Las Vegas, Phoenix and Washington, DC.

We're in the process of refinancing our mortgage, hoping to save a couple hundred bucks a month. It looks good so far, but one major obstacle is home value; if we don't own at least 20 percent of the value of our home, we have to pay private mortgage insurance (PMI), which eats about half of our savings from refinancing.

PMI is evil. It protects the lender from the expense of foreclosing on the property if you default. In other words, your bank thinks you might not be able to pay every month, so they're going to make you pay extra up front. Great, huh? We avoided PMI the first time around, even though we only put 5 percent down, by doing two mortgages -- one for the 15 percent to reach 20 percent (that loan was small enough to avoid PMI) and the second for the remaining 80 percent (which didn't get hit with PMI because we had the 20 percent).