Question of the week: Should I wait until I save 20% for down payment to avoid mortgage insurance?
Answer: This is a question that is timeless, I can remember going through this situation when I first started in my career and it is a conversation any mortgage professional probably has more than a few times a year.
My quick answer for most home buyers it , no you should not wait until you have saved 20% down before buying a home just to avoid mortgage insurance. There can be exceptions, as there are with almost every question regarding real estate and financing, but most often the answer it to buy now.
Here is the response I gave earlier this week in response to a client who feels they need to wait until they have saved up a 20% down payment.
At this time the only way to avoid MI with less than 20% is to have a “piggy-back” transaction with a first of 80% loan to value and then a 2nd/Equity Line (HELOC) for the difference between the down payment and the 80% loan amount. I.e. $500,000 sales price, put $50,000 down, get $50,000 HELOC and $400,000 primary loan. The drawback is later in life the rate on the HELOC will probably be higher than it is today and over time you will probably pay more than if you get MI as the HELOC doesn’t go away until you pay it off. The upside is if you get bonuses, etc you can pre-pay the HELOC and accelerate pay-off. Or instead of saving for more down payment you have locked in your home cost, the interest rate on your primary mortgage and where before you were shoving money into savings for a down payment now you put the funds onto the HELOC to pay down the balance faster—but let’s do the math to make sure the amount you can pay down is sufficient to quickly payoff the HELOC.
There are loans without MI payments on a monthly basis, which makes it seem like you don’t have MI since you are not seeing it on your statement every month, but because you have a loan with greater than 80% equity you still have MI:
Chasing the market to save on MI leads to paying more for a home in the long run than if you bought a home today with less than 20% down and paid an MI premium. Consider a home that cost $500,000 a year ago and we have 5% appreciation, that home now costs $525,000. Your down payment has gone from $100,000 to $105,000 and your loan amount has increased $20,000 from $400,000 to $420,000 (in this case it also pushes your loan limit above conforming so it also means a higher rate even if rates stayed the same unless you put an extra $3000 down to get to $417,000). So now you are paying more down payment, paying on a higher loan amount and possibly have a higher interest rate—all to save $150-200 per month in MI premiums.
The final upside to getting a loan today with a mortgage insurance premium is that the MI payments can go away after 24 consecutive on time payments and showing 20% equity by getting an appraisal from a lender approved appraiser.
My advice has always been it is probably better to purchase with 10%, or 15%, down when you can than to wait until you have 20%. You lock in the price, you lock in your interest rate, and the MI is removable later either with or without refinancing depending on what the market has done. Had you purchased a year ago with 10% down you would have had MI but the same home you are looking to buy today would cost you a lot less over the life of ownership, even with MI payments.
Mortgage insurance has a very bad reputation, but it is a very useful tool that benefits many homeowners by accelerating their home ownership and enjoyment.
Have a question? Ask me!
Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.
Fed, Fed, Fed, that’s all I hear…with apologies to Jan Brady. Every bit of economic data is analyzed by whether it supports the Fed rate doves who wish to push out any rate hike or supports Fed rate hawks who want to raise rates and soon. Between the Guess the Fed game and technical issues like supply the bond markets have been quite volatile for a few weeks now and this week was no different.
About the data, not a lot of information this week. The minutes from the Fed meeting showed that the doves outnumber the hawks and there will be no rate increase in June but the subject will come up at every meeting. It appears there should be no rate hike in July either and at least one member on the committee has been on the road saying 2016 before he thinks rates should be bumped. In comments today Yellen did not really tip her hand, though she commented on the soft labor market and business spending and did say the slowly growing economy will likely necessitate a rate hike at “some point” this year; take June off the table and “some point becomes up to six months.”
Consumer prices came in a bit mixed for April. Total prices increased only 0.1% after rising 0.2% in March and year over year prices are down 0.2%. The “core” CPI however showed a 0.3% increase and is up 1.8% from last April—“core” prices are the overall index striped of food and energy. Because of the higher core index prices some are saying the news is positive for a Fed rate hike sooner than later. However consumers do pay for food and energy and the drop in those prices have not led to increases in other spending, and that overall prices including energy and food are negative year over year is not positive for the economy. I don’t have a vote, but if I did I would be with the doves at the Fed, I don’t see economic data that supports a rate hike.
Rates for Friday May 22, 2015: With all the volatility rates have moved up to highs from early March, part of the 11 week high is also the three day weekend which usually sees higher rates on the Friday. As my commentary says, I feel rates should be lower and anticipate a drop in the coming week(s), but that is an opinion and it could always be wrong. Lock ‘em when you can.
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS
30 year conforming 3.75% Up 0.125%
30 year high-balance conforming 3.875% Up 0.125%
30 year FHA 3.25% Flat
30 year FHA high-balance 3.375% Up 0.125%
Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages. ***FHA rates have no points and credit towards closing costs
It is Memorial Day Weekend. When I was a kid it meant the pools would be open for the summer and corn on the cob and watermelon started hitting the dinner table. Summer was fully visible on the calendar and therefore days of camp, riding bikes, swimming at the pool and chasing fireflies or playing kick the can at night.
Now as an adult it still signifies the opening of the door to summer, but also a realization of all the joys we are fortunate to have in our lives secured and protected by men and women who took the soldier’s oath and gave their lives so that I, and you and our families, may experience those joys in this wonderful nation.
I hope you have a very enjoyable Memorial Day Weekend with family and friends, and also hope that you take a few minutes to tell your children the meaning of the holiday and take a few more minutes to click on the link below and assist Wounded Warrior Project with a donation. While Memorial Day is to honor our fallen military members we can also use the day of remembrance to assist those who came home from battle less than whole. If you can please click and donate: www.woundedwarriorproject.org .
Have a great week,
Question of the week: Can I use funds from my 401(k) for down payment or closing costs?
Answer: Yes, if…
If your 401(k) plan allows you to withdrawal funds for the purpose of purchasing a home, and almost all 401(k) plans do have such an allowance these days.
Most likely you will be borrowing the money from your 401(k) instead of taking a direct withdrawal, which could very likely initiate a taxable event and possible penalties for early withdrawal if you are under the age of 59 ½.
After you obtain the funds your 401(k) contributions from your salary will go to pay back the loan and then contributions will be made to build your account. In repaying your loan you will not affect your contribution limitations, i.e. the $18,000 maximum ($24,000 if over 49) for 2015. As well if you wish you can repay the 401(k) loan in one lump sum, again not impacting your contribution limit.
Some are of the opinion that it is not wise to borrow from your 401(k) retirement account to purchase a home, the theory being that money is for your retirement. The counter argument is that for many people their home becomes part of their retirement plan, either having their home paid off when they retire thereby eliminating a retirement expense or by having the home they are buying gain enough equity before they retire so when that time comes they can sell the home, “down-size,” and eliminate a large expense when retired. Borrowing $20,000 from your 401(k) account today to purchase a home that may enable hundreds of thousands of dollars in equity in twenty or thirty years seems to be a pretty good plan for retirement.
If you are dipping into retirement funds to purchase your home then make sure you retain that home even if the market dips and you find yourself upside down, you need to remember purchasing a home is a long term proposition and patience most often pays off as markets rebound and you don’t want to walk away from invested retirement money.
From personal experience I borrowed $7500 from my 401(k) in February 1994 to purchase my first home, in 1998 we sold that home and using only the equity from that sale purchased the home we own today. The 401(k) loan was paid off by the end of 1994 and the return on that investment in the first home has been well beyond the return on the $7500 in the 401(k) account. Of course past results do not guarantee future returns.
Before taking money out of your retirement account for the purchase of your home let’s discuss your situation and all options available for you for the purchase of your new home.
For the second straight week the mortgage market dropped for most of the week for no apparent reason (mortgage market, i.e. Mortgage Backed Securities, drop means rates go up). A rebound was expected when retail sales data for April came in flat, zero growth. Consumer confidence may be growing but consumer spending is not and that is not good news for the economy. Consumer spending is 65-70% of our economy so flat retail sales does not reflect a growing economy. This news should be good for lower rates.
Providing more reason for rates to drop was the Producer Price Index data for April, and push rates down it did. Wholesale prices dropped 0.4% for the month and are down 1.3% from last April. This is troubling news as it could be the beginning of deflation which is one of the most damaging economic cycles possible. On the news Thursday MBS rebounded and rates reversed their climb from earlier in the week.
Rates for Friday May 15, 2015: The retail sales and PPI data did not provide any support to any member of the Fed who wants to increase rates in the near, or even medium, future. Following up on the GDP figures for the first quarter the data supports lower mortgage rates. With the market improving yesterday and today losses from early in the week have been reversed and we are flat from last Friday. Looking ahead rates should soften, but that should have happened this week as well.
30 year conforming 3.625% Flat
30 year high-balance conforming 3.75% Flat
30 year FHA 3.25% Flat**
30 year FHA high-balance 3.25% Flat**
Enjoying the spring showers the past few days, hopefully everyone has turned off their sprinklers!
Question of the week: Can you give me a refresher on the mortgage market and why up is good?
Answer: For those who have been loyal readers of the Weekly Rate and Market Update you may wish to skip to the weekly market update part below, or stay as we go through a quick refresher on how bond markets and interest rates work. While it gets more detailed and technical than this, here is a simplified version of Bonds/Mortgages 101:
Mortgages are backed by Mortgage Backed Securities (MBS), which are essentially bonds and trade as bonds and compete with other bonds for investment dollars.
Investors like to make money. When making an investment they want to buy low and sell high, but being human they do not know exactly when the bottom of a market hits to buy or the top hits to sell. They decide to buy or sell based upon their best judgment as to what is going to happen next in a market. If stock in the DCS Corp is selling at $10 and you think the company will have a great 2010 and see the stock rise 20% to $12 you will buy; if you hold DCS Corp and it is selling at $10 and you think the CEO’s decisions will harm the company and the stock will drop 20% to $8 you will sell.
Decisions to buy or sell investments are most generally made based on information that leads investors to believe the value of the investment will go up or down in the future. If a lot of investors feel the price of an investment will go up then they will all bid for the investment and create high demand. High demand raises prices. If a lot of investors feel an investment will decline in value then they will all put their investment up for sale and create high supply. High supply lowers prices.
So supply and demand based upon investors predictions of what will happen in a market determine whether prices today on an investment go up or down.
Mortgage Backed Securities have a yield, a return on the investment, that is an interest rate. If you have a 30 year mortgage at 4%, when you pay the 4% interest payment that becomes a 4% rate of return for someone’s investment.
Now comes a bit of math that has given some people problems, including me in “Bonds and Finance” week one with Professor Botwin. Bonds and MBS have a price, a face value and a stated yield. A U.S. Treasury bond has a face value of $100.00 and pays 5% per year; if you hold the bond the U.S. Treasury will send you $5 every year. What if you can get 6% at your local bank? Why pay $100 to get $5 back when you can get $6, 20% more, from your bank? You would not, so instead of paying $100 for that bond you would offer someone $83 so the $5 annual interest payment is a 6% return. You pay a lower price to get a higher return: price is down, interest rate is up.
Suppose it went the other way? Suppose the local bank is paying 4% interest? No one will sell you a $100 bond paying a 5% return, they would be losing money. So to be competitive with the 4% return the bond will sell for $125, now the $5 annual interest payment is only 4% of the price of the bond. You pay a higher price to get a lower return: price is up, interest rate is down.
Simplified: A playground teeter-totter. On one side Jack Price on the other Joy Rate, as Price goes up Rate goes down. As Price goes down, Rate goes up.
Predicting the future of the investment is the tricky part, and why some guys on Wall Street have collected hundreds of millions in bonuses, if you are dealing with a $100 million portfolio one-tenth of one percent (0.001) is $100,000; now juggle several such portfolios at one time. That decimal point on $1 billion is $1 million (ask Congress about the decimal point on one trillion). Predict correctly and move that decimal point higher and you profit handsomely, incorrectly and the decimal point drops and you lost money on your investment.
In predicting bonds and MBS there are few lone rangers. The simple version is if there is good economic news today, or probably tomorrow, then bond and MBS price will go down—and rates up. If there is bad economic news today, or probably tomorrow, then prices will go up—and rates down.
Good economic news generally means higher rates; bad economic news generally means lower rates. If you wake up and the paper says unemployment went down and consumer spending went up, expect rates to be up. If you wake up and unemployment is higher and consumer spending is down, expect rates to be down.
The only economic data that matters this week is the employment data for April that was released this morning. Leading up to the release Mortgage Backed Securities (MBS) had been dropping all week, pretty much dropping since April 24th (dropping MBS prices mean rising rates) until a reversal on Thursday that picked up most of the losses from Monday to Wednesday.
The much awaited news was akin to the fight last Saturday, a lot of anticipation but not much excitement when the event occurred. Already some news outlets are putting up front a down tick in the unemployment rate in April to 5.4%, which is certainly positive. Not as prominently presented is that 233,000 jobs were added to the economy in April, which is between mediocre and okay, so let’s label it moderate. Of great importance is that the March data was revised significantly downward from a poor 126,000 jobs added to only 85,000 additions—which is very poor. Average hourly earnings increased only 0.1%, but year over year are up 2.2%.
Though the data right around the consensus, investors appeared to be wanting more as the news was met with a very strong rally at opening on MBS (higher price means lower rate), prices having moved back as I write this to near last Friday’s for conventional mortgages on the secondary markets. The news did not, in the words of the Wall Street Journal, “pull forward expectations for a Fed rate hike.” After a disappointing first quarter for job growth the start of the second quarter is off to a less than good start.
Rates for Friday May 8, 2015: After rising through the week on no real news rates retreated on Thursday and Friday to where they were last Friday, patience paid off for those who had the courage to wait until today to lock instead of pulling the lock trigger earlier in the week.
Happy Mother’s Day to all the moms, especially to the wonderful mom I am fortunate to have in my life showing our daughters how to be strong, honest and loving women.
Question of the week: Does it make
sense for us to add another bathroom?
Answer: The question is for a home
that has only one bathroom. The answer involves other questions.
By “make sense” do you mean as a return on
From a pure investment stand point adding a
bathroom probably doesn’t make sense. The average cost of adding a bathroom is
approximately $40,000, depending on your neighborhood the average value of an
additional bath is approximately $20-25,000. So the math does not make sense if
you are trying to add value.
Do you have three kids, two of which are
teenagers, and only one bath? Do you plan on staying in the home for quite some
time? Then it may make sense for household peace.
When adding a bathroom, family room, or other
addition the consideration should not just be whether you will get return on
the cost of the addition dollar for dollar in value of the home, because most
likely you will not. What you should consider is the added enjoyment it will
bring to your home for you and your family. If you are planning on being in the
home for quite some time then the enjoyment should outweigh the return on
If you decide to make an addition some important
things to consider are: budget, budget and budget. Especially if the addition
is a bathroom. There are many ways to bust a budget when creating a new
bathroom. From type of tile or counter top to fixtures it is easy to go from a
modest and functional bathroom to a luxury in home spa.
Before starting set a maximum limit you are
willing to spend, and how you will pay for the addition. Once your budget is
set subtract ten to fifteen percent and start interviewing contractors and let
them know your budget is the lower amount, i.e. $35,000 not $40,000.
Whenever someone talks about remodeling or
making an addition I am reminded of one of my favorite books we used to read to
the girls, “If You Give
A Pig A Pancake.”
Essentially the story is that one thing leads to another and the unintentional
consequences that result. Sort of like if you buy new drapes then the carpet
looks out of date and needs to be replace and the new carpet makes the
furniture look bad and then……
Does adding a bathroom make sense? Before you
jump to “yes” take time to explore the issue without emotion and being
objective—you may find it does. Or maybe n ot.
Remember, with Dennis it’s not just a mortgage,
it’s your complete financial picture.
of major economic releases this week. Consumer confidence has slumped,
mostly based on falling assessment of the jobs market. Consumer spending
increased in March growing 0.4% after a slow February. While spending increased
personal income did not, staying flat for March. The combined news of dropping
confidence, flat personal income should push rates lower, higher consumer
spending should push rates higher so the combination of news should lead to
lower or flat rates.
was double dose of news that moves markets. In the morning a 1st
Quarter Gross Domestic Product was released showing only 0.2% growth in the
quarter. Citing poor weather and a strong dollar as reasons for this some
analysts seem to be trying to shrug off the report, but whatever the reasons
the economy was moribund in the quarter following a less than good 4th
Quarter of 2014. Off-setting the
weather/dollar reasoning is the tepid news received thus far for the 2nd
Quarter, the results of which will be announced about when the Fed is meeting
to determine if it will finally pull the trigger on raising rates. This news
should push rates lower as it supports continued low rates for some time.
afternoon the Fed minutes were released. Someone posted a copy of the March
minutes combined with the April minutes and the slight change in language was
almost comical given the reaction to the minutes on Wednesday compared to the
reaction in March. As an example in April the Fed said economic growth has
“slowed” since it met in March; in March the minutes said that growth had
“moderated” from January. Po-tay-to, pah-tah-to. Taking the cue from the
weather watchers the Fed felt the slow 1st Quarter was “transitory”
due to weather and the strong dollar. Pushing markets was taking out language
regarding a rate hike. In March the minutes ruled out a hike in April, the
minutes released Wednesday there was no such language putting a possible rate
hike in June as a possibility. While increasing the chances of a rate hike in
June by taking out the language of no imminent hike, the Fed then downgraded
virtually every segment of the economy: labor conditions from improving to
moderating, household spending from rising moderately to declining, business
investment from advancing to softening, exports from weakening to declining.
With the negative analysis of the economy and inflation still below target
there is plenty to support the Fed doves who wish to have rates remain where
they are for a longer period. The details of the minutes should push rates
lower, the removal of the statement about rate hikes pushes them up.
labor front unemployment claims give a little ammunition to the Fed rate
hawks as claims for the week dropped over 30,000 from the prior week to 262,000
initial filers—the lowest level since April 2000. This news is unfriendly for
Friday May 1, 2015: Most of the news should have pushed rates lower showing
an anemic, at best, economy but the data was trumped by the Fed removing the
language regarding no imminent rate hike. My economic’s degree reading the tea
leaves suggest rate at worse should have maintained last week’s level. What
gives me some jitters is the May surprise we had in 2013 when rates suddenly
spiked in the month on rumors the Fed would stop its massive buying of bonds
and mortgages—which when they did quite some time ago and rates today are where
they were in 2013. Go figure. With rates rising this week against the tide of
economic data my advice is extreme caution against floating any rates, lock in
when you are able.
MORTGAGES AT COST OF 1.25 POINTS
conforming 3.625% Up 0.125%
high-balance conforming 3.75% Up
30 year FHA
high-balance 3.375% Flat**
Please note that
these are base rates and adjustments may be added for condominiums, refinances,
credit scores, loan to value, no impound account and period rate is locked. Rates
are based on 20% down (3.5% for FHA) with 740 FICO score for purchase
mortgages. ***FHA rates have no points and credit towards closing costs
A lot going on
this weekend, especially for sports fans as all four major sports are in
action, plus the sports that used to be considered primary sports. Basketball
and hockey playoffs continue, baseball is in full swing and football has the
final rounds of the draft. Since tomorrow is the first Saturday of May that
means the Kentucky Derby is being run and tomorrow night the “sweet science” is
on center stage for the first time in a long time with the long awaited, by
those who follow boxing, bout between Mayweather and Pacquiao. A good weekend
to own a sports bar!
Have a great
Question of the week: What can we do
to make it easier and faster for you to process our mortgage application?
Answer: Don’t staple items together
and do not provide copies that are two sided.
A bit tongue in cheek on the answer, but those
two items do slow down the process a bit.
Everyone needs the same basic items for a loan
application, having copies (electronic or paper) of these items available when
you begin the process will save considerable time in processing your loan and
chasing items that we know are needed up front:
2013 & 2014
2013 and 2014
federal income tax returns, all schedules. Note that if you use a tax preparer
they can usually send us electronic copies directly with your consent
**All pages of
most recent two months statements all asset accounts, including primary
checking/savings, investment and retirement accounts
statement (if currently own)
statement showing premium and coverage if currently own, name and contact information
of insurance agent if buying for first time
**We have discussed asset statements and deposits
several times in the past and they continue to be a source of delay for those
not providing all the documentation we request.
If you have any unusual deposits, i.e. deposits that are not part of
your employment, be prepared to show the source of the deposit. This is one of the primary hold ups to final
loan approval: verifying funds and deposits.
Another hold up is adequate insurance coverage. Single family dwellings must have replacement
coverage of 84% of the replacement value of the property as stated on the
appraisal or the full loan amount, which ever if less. If you are refinancing be aware you may need
to increase your current coverage to meet the requirements of the lender for
Finally, the most important way you can improve the
efficiency of the process is to ensure we have the best ways to contact you
quickly if some additional information is needed from processing or underwriting. Do you respond fastest to work phone? Mobile?
Preparation is always the primary factor in the
success of any endeavor, the better prepared you are with your financial
information for delivery to us the quicker your file can be processed, approved
data dominated economic news this week, which isn’t saying much as there
was scant news. Existing home sales rebounded strongly as the winter weather
abated. Existing home sales surged 6.1% in March and the national median sales
price jumped 5.1% and is up 7.8% year over year. The growth in sales is the
highest in one month since December 2010 and the year over year price increase
is the highest since February 2013. With higher prices more homes should come
to market and possibly relieve some of the tightness in inventory. This news is
supportive of higher interest rates.
sales data tempered enthusiasm over re-sale data. Surprising to the
downside of expectations new homes sales fell 11.4% in March. With more new
homes coming on the market and fewer moving off the market builders are seeing
a larger inventory than they would like. This news is positive for lower rates.
ahead two weeks when the April job report is released we can forecast a
more favorable report for April than we have for March. This is based on unemployment
claim filings for the month, which have been under 300,000 new claims each week
for several weeks. The four week average of new claims has dropped 20,000 from
last month. As this news portends a positive employment report for the month
the news is supportive of higher rates.
Friday April 24, 2015: Mortgage Backed Securities (MBS) are trading mostly
sideways for the past few weeks with a brief dip yesterday (higher rates). The
net result is a slight increase in conforming rate from last Friday. We remain
in a range that is around a two year low.
conforming 3.5% Up
high-balance conforming 3.625% Flat
For those filing
at or near the April 15th deadline and expecting a refund from the IRS
or state you have to wait a bit longer this year than years past. The IRS is
currently quoting approximately 21 days for electronic returns to be received,
verified and refunds sent out for direct deposit. If you are expecting a refund
from the State of California and filed electronically the estimate is ten days
for you to receive your automatic deposit.
Just to make you
feel a bit better, next Thursday is “Tax Freedom Day” for Californians. The
folks at the Tax Foundation estimate that the average working Californian must
work until April 30th to pay their state and federal taxes—but after
that all the money you earn is yours!
Dennis C. Smith, California Bureau of Real Estate Broker #00966315; NMLS #296660
Stratis Financial Corporation, California Dept. of Real Estate Broker #01269597; NMLS #238166