Mortgage insurance is viewed nearly universally as a bad thing, but in reality, it’s a tool to be used that is very good for home buyers, the housing market and the economy in general.
Why do many complain about mortgage insurance? Because it’s expensive, and sometimes difficult to get rid of when it’s no longer necassary. If that’s the case, why do I say it’s good for buyers and the economy? Because it’s a tool that allows people to buy a home with less than twenty percent down.
Mortgage insurance insures the lender against the risk of the buyers default on the loan. It does NOT insure the buyers life, like many people think.
The single biggest hurdle for home buyers is accumulating an adequate down payment. Lenders want buyers to put twenty percent down for two reasons. First, a buyer with a large down payment is less likely to quit making their payments. Second, if a buyer does default, the more the buyer put down usually means more equity in the house when the lender forecloses, which means the lender loses less money.
But, if a buyer wants to buy a $200,000 and has to put up a twenty percent down, that will equal a $40,000 down payment! Hard to save up, for most buyers. BUT, with the use of mortgage insurance, that buyer might be able to put as little as $6,000 down! A lot easier to save.
So, mortgage insurance can be a very benficial tool.
With that being said, don’t let your lender shoehorn you into only considering monthly mortgage insurance. There are other options such as single premium mortgage insurance, or “split” mortgage insurance. These programs can be more expensive up front, but sometimes much less expensive over time. They don’t work for everyone, but they certainly should be looked into.
Many people will tell you that an Adjustable Rate Mortgage (ARM) is horrible, and something a borrower should never take out. A friend recently stopped by worried that his ARM was adjusting and that his payment would go through the roof. We analyzed his paperwork and found out that his interest rate would be going down by MORE THAN 2 PERCENT! This made a big impact on his payment!
Had super short introductory periods like two years or less
Had a pre-payment penalty that was in force longer than the first adjustment of the loan
Had a payment that didn’t even cover their interest
These loans were definitely toxic.
The difference between today’s ARM’s? Today’s ARM’s are much safer and better loans. If you think you are only going to be in a property for 5, 7 or 10 years, you can find an ARM that has a fixed rate time frame that matches! Here are features to look for in an ARM:
A fixed rate period that is the same or longer than the time frame you are planning on staying in the house. If you think you’ll be there for five years, get a 5 year fixed ARM, or a 7 year fixed ARM.
Caps or limits to how high the interest rate a go to both at each adjustment and for the life of the loan.
Low margins. What’s a margin? Essentially, it’s the lenders “mark up” over the cost of their funds. The lower the margin, the lower your future interest rate.
Most importantly, a lower rate than a 30 year fixed rate loan. If you are sharing the interest rate risk with the lender, you should get a break in your costs.
Recent customers of mine who are moving to a new town for just five years, will be saving over 1% in interest rate compared to the thirty year fixed rate loan. For them this means about $100 per month! For $100 a month, they can buy their loan officer a steak dinner every month for getting them such a good deal!
Don’t be fooled by so-called experts. ARMS are a great deal IF MATCHED to the correct situation. Thirty year fixed rate loans are great, but sometimes an ARM is a better option.
The government has set aside $7.6 billion in an effort to help home owners avoid foreclosure and strengthen markets where housing has been particularly hard hit.
The HFAs will determine which borrows meet the requirements of the program. If the borrower is already under another Fannie Mae program to reduce or defer payments they will not be eligible unless the former program is canceled. In other words, consumers can’t double dip. This includes borrowers who are under a HAMP trial. HAMP modifies the terms and amounts of loans so that borrowers are better able to make payments. This may include principle reduction or loan duration changes. HAMP beneficiaries begin with a probationary, trial period for a few months where they establish that they can meet the modified payments. After the trial they may be eligible to make the new loan terms permanent.
In some cases HFA’s may forestall foreclosures that are scheduled but have not been executed.
The HHF Reinstatement Program may be applied to help a borrower catch up on payments that are delinquent.
HHF programs are temporary in nature. If the beneficiary is still unemployed at the end of the program, service providers may look into other Fannie Mae options like forbearance.
What is most attractive about Land Sales Contracts or seller financing in general is the buyer and the seller can develop agreements that will fit each others needs. Recently a buyer and seller came to an agreement on the selling price of a home. The buyer had very little for a down payment. The seller proposed that the buyer make down payment installments during the term of the agreement. In this case the buyer and seller had to agree on a couple things. First they had to agree how much the down payment would be. Second they had to agree on how many installment payments the buyer could make. In this case, the contract for for 60 months and the seller and buyer agreed on a 48 month down payment installment plan.
Sales Price………$250,000 Down Payment…….10% ($25,000) Buyer will pay 50% ($12,500) at closing and will pay the rest of down payment over 48 months at $260.42 per month.
Payment………….$1496.93 Payments Amortised over 30 years
Buyer to pay Property Taxes ($1953 per year) and Insurance ($258) during term of contract.
Contract Term…….60 Months (Balloon payment of balance due month 61)
Monthly Payment Break Down
If the seller and buyer had agreed that the buyer was to make interest only payments instead of a 30 year amortization then the payment would be a little smaller.