Dennis' Mortgage Blog

Question of the week:  How long do I have to pay mortgage insurance?

Answer:   We are getting this question a lot since many of our mortgages include mortgage insurance, both conventional mortgages with less than 20% down and FHA mortgages which are a major part of the industry these days.  With the elimination of the piggy-back mortgage products that allowed home buyers to purchase with less than 20%, and in many cases no money down, and avoid mortgage insurance by having a 1^st Trust Deed, or mortgage, at 80% loan to value and a 2^nd Trust Deed for the balance of the purchase price.  With these no longer available we must use mortgage insurance, also known as MI. 

Nothing lasts forever, not even mortgage insurance.  Here are the basic guidelines for saying good-bye to MI:

Conventional Mortgages:  For conventional mortgages Private Mortgage Insurance (PMI) is used to insure mortgages with less than 20% down.  In the current market many regions of the country labeled “Declining Markets” by Fannie Mae/Freddie Mac have limited availability for mortgage insurance with less than 10% down, many insurers not insuring hi-balance mortgages over 90% loan to value or condos over 90% loan to value.  But if you do have PMI on your mortgage the basic guideline is you must have the insurance for a minimum of two years, all your payments must have been made on time and your loan balance must be at or below 80% of the lesser of the original purchase price or appraisal at the time of the loan. 

In the old days….It used to be that if you could provide your lender with an appraisal showing the market value of your home has increased enough that your current mortgage balance was 80% of the home’s value the lender would rescind your mortgage insurance.  Not anymore, now the actual balance of the mortgage must be reduce to 80% of the original value of the home when you purchased the property or obtained the loan.  I.e. Property value = $450,000; mortgage amount = $405,000 (90% loan to value), in two years you have remodeled your home, taken it from the dog on the block to the nicest and the value is $500,000, plus you have paid down about $10,000 in principal so your loan balance of $395,000 is 79% loan to value.  Can you remove your MI? Nope, your current balance of $395,000 is 87.8% of the original value of the home.   Your MI will stay in place until your mortgage balance is $360,000, 80% of the original $450,000 value.

FHA Mortgage:  There are two forms of MI for FHA mortgages, 2.25% of the original loan balance is added to the loan for the Upfront Mortgage Insurance Premium (UMIP) and then 0.55% is the on-going premium for Monthly Mortgage Insurance (MMI).  The UMIP is partially refundable if you pay off the mortgage through sale or refinance, or just have the money to pay it off, within the first seven years of the loan.  The sooner you pay it off the higher your refund.

The MMI operates similar to PMI when it comes to removal, except instead of two years the MMI must continue for five years and the mortgage balance needs to be 78% of the original home value instead of 80%.

Depending on your initial loan to value it can take you anywhere from five years to ten years to reach the necessary loan to value limits for removal of mortgage insurance.  

Have a question for me?  Ask me!

Mortgage Backed Securities have retreated most of this week dropping down to levels from two weeks ago after the surge last week.  The sell off has been based on a few factors, but mostly MBS are reacting to stocks and equities.  On a daily basis as the stock markets go up, MBS go down and therefore rates move up and vice-versa.  I have been noticing however several days when both stocks and bonds are sold off, which means investors are stockpiling cash.  With investors moving to cash and banks remaining tight on their lending there is a reduction of credit and circulation of the money supply; this restricts economic growth and recovery.

Following the lead of investors in April as personal incomes rose by 0.4% but spending was flat as personal savings grew; we too are sitting on cash.  Consumers helped post a 3% annualized growth in Gross Domestic Product (GDP) for the first quarter with increased spending in the quarter.  However in the 2^nd Quarter that number may cool with a reduction in home sales after spikes in March and April due to the expiration of the IRS home buyer tax credit and continued unemployment claims well over 450,000 per week.  While in the short term the any positive news on the economy has bumped rates higher, in a longer term the economy is inching along which supports lower rates for now.

Home sales surged in April as mentioned, due to buyers hurrying to enter into contracts before the April 30^th  deadline for the IRS credit.  We saw a similar surge in December 2009 before the extension of the tax credit, and then a big drop off in January.  Tracking the Weekly Applications Survey from the Mortgage Bankers Association the purchase mortgage index has been dropping for four straight weeks and is at its lowest level since April 1997.  Purchase mortgage applications are over 27% lower than May 2009 after increasing through March and April.  Based on this information we can expect the existing home sales data released next month for May sales to record a large drop from April’s number.

Looking ahead we have not seen complete resolution of the credit issues in Europe.  While moved to the back pages of the dailies there is still quite a bit of social and political unrest as Europeans are faced with a dramatic change in their post-World War II polity based on social democracy and government benefits.  Greece, Italy, Spain, Ireland and Portugal have reached the tipping point where government benefits have exceeded worker productivity and tax revenue.  Something must change and it will have to be the government payments, this will not come easy but it will be easier if the governments make the changes voluntarily, with great encouragement from those loaning them their bailout funds.  If we see more of a slide in the Greek fashion by other nations we can expect U.S. bond prices and rates to benefit.

However….what of our bond rates and ability to borrow?  This week our national debt surpassed $13 Trillion and our deficit is over $3.5 Trillion (here is a great site if you like numbers to track the debt, deficits, tax revenues, etc.  U.S. National Debt Clock) which has rating agencies, getting tremendous heat from Congress for their ratings on Wall Street firms leading into the credit crisis, are starting to question the U.S. Treasuries Triple-A Plus rating.  If there is any loss of confidence in America’s ability to repay its debt then we will see tremendous repercussions throughout all markets.  In the meantime Congress is looking at spending another $300 billion on spending packages without using the “pay-go” formula of cutting spending elsewhere. 

Oh, and there is currently no budget resolution being discussed which means Congress and the Administration can spend without any basis or guidelines.  Remember to vote in your primary on June 8^th.

Rates for Friday May 28, 2010: Mortgage Backed Securities fought a losing battle all week against profit taking and re-allocation into stocks.  Conforming rates were hit harder than the FHA, and we are back to where we were two Friday’s ago.

FIXED RATE MORTGAGES AT COST OF 1 POINT*

30 year conventional 4.75%                              Up 0.25%

30 year conforming-jumbo 4.875%                   Up 0.25%

30 year FHA    4.5%                            Up 0.125%

30 year FHA jumbo 4.75%                              Up 0.125%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, and period rate is locked. 

Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment and a minimum FICO score of 740; APR is not quoted as it is dependent upon specific loan amounts, lenders and services selected.  Numbers provided are for comparative purposes only.

If you or your clients are actively pursuing the American Dream of home ownership this long weekend and need assistance please contact me as I will be available throughout to assist you—though rumor has it we may be checking out the latest Shrek movie at some point.

As we enjoy a three-day weekend with our national holiday on Monday let’s take time to reflect on the purpose of Memorial Day and honoring those who have sacrificed their lives in protecting our liberties and freedoms.  God blesses our men and women in military service, those who have died protecting our nation, their families and America.

Have a great week,

Dennis