Mortgage Terms category archives

Private Mortgage Insurance (PMI) is one of the most common yet most widely misunderstood concepts in mortgage lending today - at least from the borrower’s viewpoint. When many borrowers hear “mortgage insurance,” they tend to thing hey - that’s great!  I’ll be protected in case I can’t pay my mortgage!” However, this mortgage insurance is not in place to protect borrowers.  Rather, it’s put into place to protect lenders.

See, in situations where borrowers are unable to put down 20 percent or more for a home purchase, lenders tend to get a bit hesitant to lend - at least with out a hedge against their bet.  Experience has shown them that borrowers with less than 20 percent down tend to default on their loans more often.  So, lenders require those borrowers to pay a monthly fee to cover an insurance policy that in turn, protects  - or insures - them in case you can’t meet your financial obligations.

How Private Mortgage Insurance (PMI) Breaks Down Here’s How PMI Works

Say you’re getting an mortgage and are prepared to put 5 percent down on your home.  The lender requires any borrower putting down less than 20 percent to pay for an insurance policy that protects them in case the borrower becomes unable to pay on the loan.  In this scenario, you’ll likely pay a set fee per month as part of  your mortgage payment to cover this insurance.

Should you at any time default on your mortgage loan, the lender would benefit by receiving the 15 percent you did not pay as part of your down payment at closing.  Remember - 80 percent.  That’s the magic number lenders feel comfortable lending without requiring PMI.

Ending Your PMI Payments

The Homeowner’s Protection Act of 1998 requires lenders to automatically suspend PMI billing once you’ve attained 22 percent equity in your home.  However, once you have paid on your mortgage to a point where you have the required 20 percent accumulated, you can and should request that the PMI fees you pay each month be suspended.

Zillow Mortgage Marketplace recently launched a unique Break-Even Point graph on every loan quote borrowers receive from lenders.  This graph helps borrowers who want to refinance determine their “break-even” point, which is when they would start saving enough from a new loan to offset the costs of refinancing.

After anonymously submitting a refinance request, borrowers are presented with custom quotes from a network of thousands of lenders.  When borrowers click on an individual quote to get more information, they can view this new graph which indicates how long they need to live in their home to offset the costs refinancing.

In addition, the graph shows the cumulative savings that would occur over the entire life of the loan.  Borrowers can use the interactive feature to scroll across the graph to see the accumulated savings in each year.

On Zillow Mortgage Marketplace, the average borrower gets 24 quotes in 6 seconds.  With the launch of this new feature, Zillow calculates and creates an interactive Break-Even Point graph on each refinance quote instantly, something that would be very difficult for borrowers to do manually.

Given the historically low mortgage rates we’ve seen this year, refinancing a mortgage is something that many homeowners are considering right now.  This new graph helps borrowers quickly and easily compare the break-even point on all the refinance quotes they receive to determine which loans make the most financial sense for them.

If you are looking to refinance and want to try it out, submit a refinance loan request — anonymously — on Zillow Mortgage Marketplace.

I’m always answering questions regarding the protections in place for mortgage loan borrowers, and as I feel that operating above board is really the only way to fly - I wanted to address one of the most powerful protections in place today - the Truth in Lending Act (TILA).

The Truth in Lending Act (TILA) dates back to 1968 and was put into place as a protection for consumers requiring full and clear disclosure of the terms related to credit transactions - including all costs involved.

The Housing and Economic Recovery Act of 2008 made some key changes to the TILA active as of July 30, 2009.  Though many of these changes may not be immediately apparent to most borrowers, there are a few that change the way key processes are put into place, and some that might impact when your mortgage loan closes.

Mortgage brokers and loan officers who stay on top of regulations will be able to plan for these changes, but it’s important that you are aware of them as well - just to be sure everything with your home loan goes as seamlessly as possible.

This said, financial regulations rarely remain unchanged through the years, and the TILA is no exception.

What Changes Were Put Into Place?

The changes in the Truth in Lending Acts are mainly on the new disclosure requirements for the applied mortgage loan of the consumer. The Federal Reserve Truth in Lending Regulation applies its revised laws for loans filed and submitted on or after July 30th 2009. Most lenders find the revised version of the TILA quite complicated and challenging, oftentimes causing delays for the supposedly swift transaction between buyers and sellers.

Here are some of the main changes included in the July 30, 2009 TILA update:

1. Fee Collection Limitations Imposed: Mortgage lenders are not allowed to collect fees from consumers in excess of those fees required to cover the cost of obtaining borrower credit history, until the consumer has reviewed the Truth-in-Lending (TIL) paperwork.  This paperwork includes, but is not limited to, the information found as part of the Good Faith Estimate - which discloses your loan’s annual percentage rate, finance charges, the amount financed, and the total payments you’re required to make.  TILs must also be provided on refinance mortgages.

2. 7 Day Waiting Period in Effect: Home loans are not allowed to close until 7 business days after borrowers receive the TIL. For mortgage transactions, business days run from Monday to Saturday.

3. A “You’re Not Committed” Statement has Been Added: OK, so this is not the actual name of the rule, but in essence, you’re not obligated to close the loan just because you’ve received disclosure documents or have signed a mortgage application.  Don’t let lenders pressure you into anything.  If you don’t feel right about the deal, back away.  Period.

4. New APR Change Waiting Period is in Effect: If the APR changes, a 3 day waiting period is tacked on before the loan can close.  This means that if you are quoted one APR, and then that APR changes for any reason, then the lender is required to wait an additional 3 days after you’ve received the revised paperwork before they can close the loan.  Each time the APR changes (which is hopefully not often at all), another 3 day waiting period goes into effect.

All in all, these changes are meant to provide borrowers with added protections.  In a perfect world, a handshake would seal a mortgage deal.  However, we’re just not there in today’s age.

Always demand clarity and up front disclosure from your mortgage broker.  Once it’s delivered, the obligation then falls on you to read through your loan documents and decide whether the deal makes sense to you or not.

Despite signs of an improving housing market, homeowners continue to be under financial stress.  According to Reuters, the 30-day mortgage delinquency rate increased again in August, reaching a new all-time high.

The chart above shows significant year-over-year increases in the delinquency rate.  The August ‘09 rate of 7.58% increased 55% versus the August ‘08 rate of 4.89%.  Month-to-month, the rate increased 3.6% versus the July ‘09 rate, which was 7.32%.

This delinquency rate is an important number to watch, as it is a leading indicator of home foreclosures and personal bankruptcies.

Looks like we’re not out of the woods yet.

In Part II of this three-part series, I will discuss how “Caps” work on an ARM (Adjustable Rate Mortgage).

A cap on an ARM determines the maximum amount your mortgage rate can adjust, or “what it caps out at.”  As mentioned in Part I of this series, a traditional fixed-to-adjustable mortgage is fixed for a period of time then adjusts on a regular schedule.

There are three caps on a mortgage.  Here is how each one works.

Initial Adjustment Cap

When your loan reaches its first adjustment after its initial fixed period, the first rate adjustment is the “Initial Adjustment” of your loan.  The Initial Adjustment Cap will determine the maximum your loan can adjust the first time.  If the Cap is 2%, then your loan cannot move more than 2% from your start rate, up or down.

Let’s say you have a 5/1 ARM with a 4.5% interest rate and a 2% Initial Adjustment Cap.  After 5 years, the new rate can adjust from 4.5%.  However, it cannot move higher or lower more than the 2% Initial Adjustment Cap.  That means the lowest your loan can adjust is to 2.5% and the highest it can adjust is to 6.5%. 

Periodic Adjustment Cap

The Periodic Adjustment Cap is the maximum amount your loan can adjust each time after the initial adjustment.  Each time the loan adjusts the Periodic Adjustment Cap limits how much your loan can adjust from the previous rate you were just paying. 

Let’s use the same 5/1 ARM loan above as an example.  Let’s assume this 5/1 ARM has a 1% Periodic Adjustment Cap along with the 2% Initial Adjustment Cap.  Without going into margins and indexes (This will be discussed in Part III of this series), here is a worst case scenario rate schedule for 7 years.

5 years at-           4.5%

1 year at-             6.5%     (Initial Adjustment)

1 year at-             7.5%     (Periodic Adjustment)

In a best case scenario, here is your rate schedule for 7 years.

5 years at-           4.5%

1 year at-             2.5%      (Initial Adjustment)

1 year at-             1.5%      (Periodic Adjustment)

Lifetime Caps and Floor Rates

A Lifetime Cap is the maximum your loan can adjust over the life of the loan from your start rate.  This means your rate will never exceed the Start Rate + the Lifetime Cap.  If your ARM starts at 4.5% and has a Lifetime Cap of 5%, your rate will never go above 9.5% regardless of how many times it adjusts and how long you keep the loan.

Your Floor Rate is the lowest your rate can go.  This means no matter how much your rate adjusts down, it will never go lower than your Floor Rate.

Link to Understanding Adjustable Rate Mortgages Part I

Link to Understanding Adjustable Rate Mortgages Part III

I got an e-mail yesterday asking: What is a 203K loan?  Every once in awhile I need to remember that I sometimes use acronyms and assume everyone knows what I am talking about.  The reality is…in many cases the acronyms do more to confuse folks than to clarify.  So I am going to take a step back and explain a little about the “203K” loan.

This loan program can be used for the purchase or refinance of a property that needs work.  It allows you to borrow the funds you need to purchase and renovate the property.  These loans are not new but took a back seat to other ways of financing the cost to renovate.  With property values no longer increasing by double digits, and with equity loans being capped at 70-80% of current values (rather than 100% you could get just a few years ago), the options for financing renovations are limited.  I started a thread on Zillow asking how folks are paying for home improvements.  Inquiring minds want to know! 

In addition to the FHA 203k program similar programs are offered by Fannie Mae and Freddie Mac.

I have been in mortgage lending since 1993, and until recently, I had never actually had a short sale close successfully.

One of the real estate agents I work with regularly, Rachel Hillman of Realty Executives, introduced me to Mike Ouellette of Loss Mitigation Specialist Group ( LMSG). For those that have followed me on Zillow, I am a bit of a skeptic when it comes to these types of things.
Rachel called me about a deal she had that was falling apart and she was hoping that I could pull the deal back together.

Basically, the way this company works is that they sign an agreement with the current owner of the home to essentially buy the home in a short sale. The current owner gives them permission to deal with the current lien holders. While they are negotiating with the current lien holders the property is being marketed. In most cases the property is listed and marketed by the agent that has introduced the seller to LMSG.

Unlike most short sales with this company LMSG actually buys the property after negotiating the short sale, then turns around and sells the property to a third party — the best offer that the listing agent is able to find.

The reason that Rachel called me in on this transaction is that many lenders have adopted the FHA anti flipping rule and are requiring 90-day title seasoning.

Reducing the length of time they need to hold the property increases the profit margin but also allows them to list and market the property at a more competitive price generating more interest and multiple offers.

Nobody works for free and I don’t begrudge anyone for making a living. Many lenders shy away from these transactions, some will even say that Fannie Mae and Freddie Mac have the same title seasoning requirements that FHA have.

Currently that is not the case. The concern is fraud and you can read Fannie Mae’s guideline on these transactions here and Freddie Mac’s here

Essentially both agencies have the same concern that the sales price is over inflated. It is critical that the underwriter and the loan file support the sales price from LMSG to the end buyer.

It is no secret that is costs the banks real money to foreclose on a property.t is also no secret that the property value is…. what it is! The bank has no guarantee, that if they foreclose on the property, that they will be able to sell the property for its current value.

If you know what you are doing you can essentially cut a deal with the bank for an amount less than the property is worth and likely a little more than what the bank estimates it will cost to foreclose on the home.

If the bank agreed to a short sale, before they foreclosed, and sold it for $195,000 rather than the $250,000 they would reduce their losses by $5,000 and eliminate the risk of the property value decreasing further and increasing the banks losses. For this to work you have to know what it costs the bank to foreclose, I just told you so that’s not such a big deal.

The real trick is knowing who to call and how to negotiate the short sale or you end up in lender limbo waiting for a response that you may or may not ever get! All the while stressing about what is going on!

I have closed 2 of these transactions and it almost seems too good to be true! These are the real numbers….

Property One: Purchased for $207,000 Appraised for: $225,000
Property Two: Purchased for $220,000 Appraised for: $255,000

Both appraisals were done post-HVCC so I know if anything, these appraisals are on the low side.

How many transactions have you seen recently that are appraising 15-20 thousand more than the sales price?

If you want more info on short sales you can read Mike’s Blog. Mike works with Realtors, Lenders, Attorneys, and Sellers.

Well….I figured I would give YouTube a whirl… I finally got around to putting some before and after photos together from a K loan I closed on 12/28/2008.

Purchase Price $192,000

Cost of Renovation $32,642

After Improved Value $260,000

Equity After Renovations $35,000+…..$33,000 can make a HUGE Difference!
I sent my clients a link to my blog when I posted it….This was her response:
“Wow, so cool that you used my pics :)   A month ago another lady was driving by and said she was an appraiser using my house as a comp.  She came in to see the improvements and then when we queried her on what she thought we’d be able to get for this house today she hemmed and hawed, then said, prices have dropped since we bought so we’d probably lose money…. because she can see we’ve put in a ton of money (not true, but that’s what she thought).   Then she said in this market with the economy so bad, I’d be able to get $350,000
That made me very happy :)”     -Owner of the home in the video

This was the name of the presentation I was lucky enough to attend today that was presented by Doug Duncan Vice President and Chief Economist for Fannie Mae.

I gleaned a couple of things from the presentation.  As always these are my understanding of his presentation and as he had in his presentation I would also like to add a 10 page disclosure essentially saying that I cannot be held accountable for any of these predictions…If they come true…I accept credit…If they don’t…I was never here and never made these predictions!

1. The economic models we use to predict what we expect to happen are pretty much useless since we have no historical data that is similar to what has occurred over the past two years!  This really supports my theory that no one has a clue about what to expect…Even the folks we think should!
2. The Fed is going to have to start talking about an exit strategy from the credit and MBS markets.  Oh boy…I can only see this adding to the volatility of the MBS Markets regardless of what they do.  Investors don’t like uncertainty. At some point they will have to say how they intend to get out…Investors will have to figure out how that will impact the markets.  I have serious concerns that the unknown will have many investors sitting on the sidelines trying to figure out the new rules of the game before they start playing the game!
3. Rates will be going up.  The conventional rate markets are being artificially held low…when that stops margins and risk factors will likely rise.  I think a better gauge of were rates will be is to look at the real Jumbo Market rates.  Those rates are being set by the market and may paint a more accurate picture of what rates will be adjusting too.
4. The recovery will be SLOWWWWWW.  The majority of Americans’ are way over leveraged and it will take time for this to get back to sustainable levels.

What this all means…I am really not sure…But at least I know folks that are much smarter than I aren’t really sure either!