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WHAT IS MORTGAGE INSURANCE?

Fri, 09 Mar 2018 19:45:57 GMT

For many people, paying mortgage insurance is a necessary evil. It goes by a couple different names: PMI (private mortgage insurance) is required on conventional loans, and MIP (mortgage insurance premium) is the Federal Housing Administration (FHA) version. No matter what you call it, people really seem to hate paying for it.

Why the hate? Frankly, it seems like a bit of a racket from the homeowner’s perspective. Unlike most other insurance products people buy, mortgage insurance does not protect the person paying for it. Crash your car? Your car insurance company pays on your claim to get it fixed. House hit by hail? Homeowners insurance to the rescue. But the monthly payment you make on your mortgage insurance premium protects your lender , not you.

Basically, mortgage insurance covers your lender’s risk so they won’t lose money in the case of loan default.

Mortgage insurance is required on all conventional mortgages where the homeowner owes more than 80% of the house’s value. It is required on all new FHA loans, regardless of how much is owed. The amount you pay for mortgage insurance varies, depending on your loan-to-value percentage – the amount you owe versus your home’s value. The higher that percentage, the more you pay for your mortgage insurance.

So is mortgage insurance evil? Not really. The alternative is that would-be homeowners not sporting a hefty down payment would be unable to buy a house. I think it’s good that we at least have the choice.

That being said, there are strategies to reduce the bill on your mortgage insurance or eliminate it altogether. There are a million configurations for implementing these strategies, so feel free to call or e-mail me if you’d like some specific advice.

Note: Please do not email personal financial information.

THE USDA RURAL DEVELOPMENT LOAN ROCKS

Mon, 26 Feb 2018 19:41:33 GMT

No down payment, fixed rate, low interest, no mortgage insurance. Rocks.

This mortgage is available for people buying houses in eligible areas , basically anywhere outside of major metropolitan regions. I live in South Dakota, where the entire state is eligible except for the bigger cities. Again, South Dakota, so I use the word ‘cities’ loosely.

There are income caps to watch. If your income is above the line, you’ll need to find a different loan. Check the income chart carefully, though. The income limits are bumped up for households with 5 or more people. Also, if you can document child care or medical expenses, you may be able to use them to offset your income if you are close to the line for being eligible. The income caps are only in effect for the day you apply. If you hit the lotto six months after you move in, you still keep your loan.

This program is a phenomenal deal for those who qualify and are looking to buy a house in an eligible area.

Share this video. And call or e-mail me if you have questions on this program.

Note: Please do not email personal financial information.
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WHAT ARE POINTS?

Sat, 27 Jan 2018 19:21:44 GMT

Look on any site schlepping mortgages & you’ll see the interest rate & how many ‘points’ it takes to get that rate. But that word, ‘points,’ is rarely explained and is often a source of confusion. So here’s the quick & dirty on what points are and how you can use them to your advantage.

A point is one percent of the loan you are borrowing. For instance, one point on a $100,000 loan is $1000.

Points come in two flavors: origination and discount.

Origination points are the fees your lender charges for setting up your loan. A one-point origination fee is traditional. Anything higher than that should raise an eyebrow and send you shopping.

Discount points are essentially prepaid interest. Buy opting to pay additional discount points, you can ‘buy the rate down’ on your mortgage, which would result in a lower interest rate over the term of your loan. It’s not a 1-to-1 correlation, though. In other words, paying one discount point doesn’t necessarily translate into a one-point reduction in your interest rate. You may see a .25% reduction in the interest rate for paying one discount point, but that ratio varies widely between loan products and is very much affected by day-to-day market conditions.

Discount points also work in reverse. You can increase the rate in exchange for ‘reverse points,’ which act as credits to offset your closing costs. If you have ever seen a lender advertising a mortgage with no closing costs, reverse points are generally at play. The rate is being increased to a level high enough to completely wash out the closing costs.

Should you pay points? Or should you pay reverse points? Maybe, it depends. You have to answer a very important question first. I’ll get into that question next week, stay tuned…

Note: Please do not email personal financial information.

ONE QUESTION

Mon, 11 Dec 2017 19:17:35 GMT

Here are the top ten questions I’m most often asked by mortgage shoppers (in no particular order):

10. What’s your interest rate?

9. How much are the closing costs?

8. What is the term (number of payments) on the loan?

7. Is there a prepayment penalty?

6. What’s your interest rate?

5. Is there a balloon payment?

4. What’s your interest rate?

3. How big a down payment is required?

2. What’s your interest rate?

1. What’s your interest rate?

All of these are really good questions to ask. But the answers will be meaningless unless you first ask one crucial question. It’s a question you need to ask yourself before you start shopping for a loan. Ready? Here it is:

HOW LONG WILL I HAVE THIS LOAN?

Not how long will I keep this house , or how long will I live in this town , but how long will I have this loan? It’s not a question you can answer with 100% certainty, but it is a question worthy of some real reflection. Give it some thought. Is this a starter home that you’ll probably upgrade in a few years? Do you have a growing family that’ll need more space in the future? Is it likely that your job will move you to a new location at some point?

Ask yourself, “HOW LONG WILL I HAVE THIS LOAN?”

Your answer could save you thousands of dollars.

Here’s how: Interest rates and closing costs exist on either end of a teeter-totter. Push one side (interest rates) down, and the other side (closing costs) goes up. And vice versa.

So, is it better to pay a lower rate or lower costs? It depends on how long you have the loan. In general, the longer you’ll have your loan, the lower you want your rate to be. The shorter you have your loan, the lower you want your closing costs to be.

I have seen people pay huge closing cost bills in exchange for a screaming interest rate, only to refinance a year later and never really reap the benefits of that rate. Conversely, I have seen people pay no closing costs in exchange for a high-rate mortgage that they pay for 20 years, effectively paying their dodged costs several times over in the form of higher interest. It’s not just about finding the loan with the lowest rate or lowest costs or the right fixed/adjustable feature. It’s about finding the most appropriate loan that fits your risk tolerance, optimized for the length of time you intend to have it. Once you know your time horizon, you can pencil out the best deal. If you optimize your mortgage terms to correspond with your expected time horizon you can save yourself a pile of money.

I run these analyses all the time, so feel free to contact me if you’d like some numbers customized to your situation. As Tigger would say, TTFN.

Note: Please do not email personal financial information.

SOUTH DAKOTA’S WACKED-OUT PROPERTY TAX SYSTEM

Fri, 03 Nov 2017 19:05:55 GMT

South Dakota’s property tax system is confusing to a lot of people. Here is what you need to know:

Property taxes are due twice a year, in April and October. The April installment pays the taxes that accrued during the first half of the previous calendar year. The October payment pays the taxes that accrued during the second half of the previous year.

For instance, when you paid property taxes in April of 2014, you paid the tax bill that accrued on your house between January 1st and June 30th, 2013.

There are three times when this system could affect you – when you buy a house, when you sell a house, and when you build a house.

Buy a house. This system feels great. Property taxes are typically prorated to the date of closing, which means the seller will credit you for the taxes that accrued last year when they owned it, since they will be paid this year, when you own it. For instance, if you are buying a house on the last day of January, you will receive a credit of 13 months worth of taxes – 12 months last year plus January. This credit can significantly reduce the amount of money you pay when you close on your house.

Sell a house. You are on the other end of that transaction, paying property taxes forward to the buyer. The prorated taxes will be subtracted from the cash you see when you sell.

Build a house. Since you are paying last year’s property taxes, the first year or so after you build you will only be paying the taxes on the bare lot. That will change about a year after you complete construction. The county will reassess the value of your house after completion, and your ‘real’ property taxes will kick in.

This adjustment always messes up peoples’ escrow accounts. The escrow account is the sidekick account to the mortgage that pays property taxes and homeowners insurance when they come due. Your escrow account won’t see the tax increase coming and it will get overdrawn when the higher taxes kick in. You will need to catch the account up with a one-time payment or spread it out over a number of months.

Bottom line: if you are building a house, expect your payments to increase about a year after your build is complete. Also, save some extra cash to bring your escrow account up to speed once your full property taxes are established.

Note: Please do not email personal financial information.

BLOOPER REEL

Tue, 10 Oct 2017 19:01:01 GMT

Mistakes. Blunders. Mess ups. Me looking like a complete idiot.