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Jim Cramer asked:




Many home buyers find it difficult to provide the required 20% down payment and are forced to pay private mortgage insurance, or PMI, in order to buy a home. Private mortgage insurance solves the down payment problem but creates another two: it increases monthly payments and on top of that it is not tax deductible. Fortunately, there is more than one way to get your desired home without having the 20% down payment and avoid PMI at the same time.

Terminating PMI When You Already Have One

The use of private mortgage insurance has been a great way to make it possible for a borrower to buy a home with as little as 3-5 % down payment and give the lender insurance in case the borrower defaults on the home loan. However since PMI payments can be significant, the borrower starts to ask himself/herself how to get rid of those payments.

The Homeowner’s Protection Act includes rules for automatic suspension of PMI payments and cancellation of PMI when 22% equity in the borrower’s home is reached. Those rules apply to mortgages signed on or after July 29, 1999, and exclude government-insured FHA or VA mortgages that are considered high-risk to default.

Additionally, disregarding the time when the mortgage was signed, the borrower may ask for PMI termination once s/he exceeds 20% equity.

Avoiding Private Mortgage Insurance via a Piggyback Loan

Piggyback loans are a very popular way of avoiding private mortgage insurance. It consists of taking a loan (first mortgage) covering 80% of the sale price of the home and taking and placing additional 5%, 10% or 15% on a second mortgage. A combination of 80% first mortgage, 5% second mortgage and 15% down payment is referred to as 80/5/15. Accordingly, the other two loan combinations are 80/10/10 and 80/15/5.

Although second mortgages generally have higher rates, in the end the borrower may save money because in contrast to PMI payments, now the loan payments are tax deductible.

Choosing a Finance Single Premium Option over Private Mortgage Insurance

Since an increasing number of borrowers are turning to piggyback loans in order to avoid PMI, the mortgage insurance industry came up with this solution claiming that it lowers monthly mortgage payments to the same or lower level as a piggyback loan. With this option homebuyers pay a single premium on their insurance and it is amortized over the term of loan.

One of the pitfalls of this solution is that few lenders offer this option, since Fannie Mae and Freddie Mac do not work with this kind of PMI structure.

Finding a Loan with No Private Mortgage Insurance

Loans with no PMI have one great disadvantage – they typically have higher interest rates. Instead of paying regular PMI, the latter is included in the higher rate of the mortgage.

Which of the above solutions will be best for you depends entirely on your particular case. Sometimes paying the private mortgage insurance might turn out more beneficial than choosing to avoid it with a second mortgage. Therefore you should consider your decision carefully and make all the necessary calculations in order to make the right choice.

Frank Bruno asked:




Think of it this way: A retail store buys its merchandise wholesale from a distributor. The store then marks up the merchandise, and sells it at retail to Mr. And Mrs. Consumer. It’s the same way with a mortgage broker. The broker establishes relationships with several wholesale lenders. These wholesale lenders have pricing that is below the rates you see published in the newspaper.

Mortgage brokers are some of the most creative people you will ever meet – they will come up with unbelievable ways to make money off you. Rarely, if ever, will they give you a no-cost loan. Brokers make their money in several ways: with front-end points, back-end points, and junk fees.

Front-end points are those that you see in advertising. They are often referred to as “discount points.” The selling point here is that when you pay more points up-front, you “buy down” your interest rate. In other words, the more points you pay, the lower your interest rate. There can be some advantages to paying points. If you are buying a home, for example, the points you pay are generally tax-deductible (consult your tax advisor).

If you are planning to stay in your home for a long time, or do not plan on refinancing, the savings you encounter in the interest rate will offset the points you pay over the life of the loan, saving you money in the long-term. However, these points also go directly into the mortgage broker’s pocket. He may have charged you a rate that you thought you “bought down,” when in reality you already had a good rate and paid points for nothing.

For example, you might have a mortgage for $150,000 at 7.5% with 2 points. Those 2 points equals $3,000 out of your pocket and into the broker’s. This is just for one loan. Multiply this by several loans per month, and you see why there are so many mortgage companies in the yellow pages.

Back-end points are fees paid to a mortgage broker from the wholesale lending institution. Usually, the higher the rate, the higher the back-end points. This is very tricky, because there are creative ways in which these fees are disguised in loan disclosures. Many mortgage brokers will hit you with a combination of both front and back-end points

Junk Fees are fees charged by brokers and/or lending institutions as an add-on to any standard fees you might pay. Usually, these fees are not tax-deductible. Junk fees can be placed under any of a number of guises on your settlement statement, including Processing Fees, Underwriting Fees, and Warehouse Fees.

Mortgage Banks

Mortgage Banks are like retail storefronts. Let’s take a shopping mall, for example. A shopping mall is an establishment filled with nothing but retail stores. The store that you go into would depend on your needs. If you need shoes, you would go to a shoe store, and so on. Each store has its own specialty.

The same is true with mortgage banks. Some specialize in dealing with borrowers with perfect credit. Some specialize in dealing with those with problem credit. Some deal with a combination of both, and so on.

Herein lies the problem with banks. You can go to one, but if you don’t fit into their criteria, you’re pretty much out of luck. If you are lucky enough to be approved by a bank, you pretty much have to live with the rate you are given. There is little, if any, room for negotiation.

Mortgage banks not to be confused with a depository institution where you would keep your checking account. Mortgage Banks do not take deposits.

Regardless of which you use, they will have roughly the same guidelines for comparable mortgage products. Always make sure that you are on top of your credit scores before approaching either a bank or a broker. By doing so, you can go into the application process knowing what they know. Brokers, especially, will treat you with a little more care when you know your own credit situation.

Mark Bennett asked:




Any mortgage rates forecast must take into account the fall-out from the sub-prime crisis – now poorly named, because the rot has spread from the high-risk sub-prime sector to even the prime mortgages underwritten By Freddie Mac and Fannie Mae.

There are several ways in which the sub-prime crisis affects mortgage rates forecasts.

1. Each Mortgage Rates Forecast Rises Due To Increasing Risk

When house prices plummet as a result of forced sales, it makes mortgage lending in general more risky. Even a 20% deposit has not been enough to prevent some home owners from defaulting on their mortgages and being unable to sell for a high enough price to cover the loan. Mortgages classified as “prime” are now showing up as losses on the books of some banks. The investor’s response to increased risk is always to require a higher return – in this case, a higher return means a higher interest rate on mortgages. Interest rate predictions must be for higher interest rates as a result of the mess in the residential real estate markets across the country.

2. Any Mortgage Rates Forecast Rises Due To Falling Supply And Rising Demand

Mortgage interest rates, like all retail interest rates, depend on the general interest rate in the wider economy – the rate at which banks and other financial institutions can borrow funds. This is usually benchmarked by the 90 day bank bill rate. Generally, lenders only have 10% of the funds they lend out as mortgages in deposits – the rest is borrowed. This is why having too many defaults on mortgages can get a bank into big trouble – they can no longer afford to pay their own debts then!

The sub-prime crisis greatly reduced the willingness of other organizations with money to lend it to banks for the purpose of mortgages. This means that the supply of credit has markedly reduced. A low supply and a steady demand will always cause prices to rise, and in this case, the price of money is the interest rate.

The credit squeeze is putting upward pressure on the mortgage rates forecast, and all interest rates in general.

3 Our Mortgage Rates Forecast Rises Due To The Falling US Dollar

As a result of the sub-prime crisis, ant its spread to the prime mortgage market, the entire US financial system is regarded by the rest of the world as unstable. This is resulting in a flight of mobile capital from the US. The only way to entice this capital to remain in the US, and thus halt the slide in the US dollar, is to pay a higher return, which means having a higher general interest rate within the US, including for mortgages.

The government bail-out of Freddie Mac and Fannie Mae, while necessary to stabilize the property market within the US, will further erode the confidence of international money managers in the US economy, putting further downward pressure on the US dollar.

Until the US dollar stabilizes, there will be significant upward pressure on any mortgage rate forecast, and interest rates in general.

While some are still arguing about the causes of the sub-prime crisis, there is no doubt that its effects are significant and far-reaching. The instability of property prices, the credit crunch, and the loss of confidence in the greenback will take several years to restore to what was previously considered “normal” – and there is a very real possibility that we will never see the US dollar as strong on the global stage again.

For this period, possibly up to a decade in length, the mortgage rates forecast is in one direction only – upward. If you can, fix your mortgage now for 30 years, because you may not see mortgage interest rates this low again for decades.