Category: Mortgage

What is PMI and How Can I Get Rid of It?

private mortgage insurance
For prospective homeowners, there are many things to learn before you even begin the process of searching for a home, especially for first time buyers. One of the most important lessons to learn for those who have less than 20 percent to put down on their home is that of private mortgage insurance (PMI).

What is PMI?

PMI is a type of insurance your lender solicits from you in the event that you buy a home without a 20 percent down payment. It usually ends up affecting Federal Housing Administration (FHA) loan applicants, because these applicants are only required to put down 3.5 percent of their total purchase price.

For any buyer who was unable to put down a full 20 percent, you should expect mortgage insurance premiums of roughly .05-1.00 percent of your total loan amount per year. There are several factors that affect the cost of your PMI:

  • Down payment size – The larger your down payment, the lower your PMI premium.
  • Credit score – Higher credit scores earn a lower PMI rate.
  • Loan appreciation potential – If your home is expected to appreciate in value rather than depreciate, your PMI will be lower.
  • Borrower occupancy – If you plan to rent your new home rather that occupy it yourself, expect to pay higher PMI premiums.
  • Loan type – The greater the risk to your lender, the higher your PMI will be. Anyone applying for a loan with a low credit score (500-650) and the minimum down payment might expect to have a higher PMI premium.

Why do I need PMI?

You may be wondering: why would anyone elect to get PMI? The short answer is they would not.

PMI is not the same as car insurance or homeowners insurance. The aforementioned types of insurance are designed to protect consumers in the event of catastrophe, such as a house fire or car accident. PMI, on the other hand, only protects your lender in the even of loan default. Not only will they take over possession of your home, but they will have the additional money you paid into your PMI policy.

How do I get rid of it?

If you are like many FHA loan applicants, there might not be much you can do about avoiding PMI altogether, but you can keep a close eye on your loan balance and request to remove it as soon as possible. Lenders are required by law to remove PMI automatically when you have paid enough to have 22 percent equity in your home. However, when you reach 20 percent, you can call your lender and request to have it removed, and they are required to comply with your request.

There are a few other ways to remove PMI:

  • Refinance your home
  • Get a new appraisal
  • Pay extra on your loan (any extra amount will be applied directly toward your principal loan amount)
  • Consider making additions to your home, which may increase its value.

Ultimately, you should try to remove PMI as soon as you possibly can. It does not benefit you as a homeowner, and you can save thousands of dollars over the life of your loan if you have it removed. For more information on how to improve your finances, including credit repair after buying a home, contact the experts at Lexington Law at 1-833-333-2281 .

 

 

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How to Avoid Paying Mortgage Insurance

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Imagine this scenario. You have found the perfect home, on the perfect street. This is going to be the place that you will set down roots and raise children with your significant other. You’re ready to purchase the home. Your mortgage broker gives you a breakdown of what you will be paying each month. You notice in the breakdown a line item titled “PMI” or Private Mortgage Insurance. This is a monthly cost that will not assist you with the interest on your loan or pay down your principal. So, how do you get rid of this expense?

What is PMI

Private Mortgage Insurance or “PMI” is not designed for your benefit. This insurance policy is designed to protect the lender from losing money if you default on your mortgage. You can avoid this payment using some of the tools that I will mention below. However, please make a careful analysis before adopting any of these methods into your mortgage borrowing strategy.

  1. You can put a 20% down payment on your home. Generally, if you put this large down payment on your home, the mortgage company will see you have something to lose if you default on your mortgage and not require a PMI policy on your loan. Please keep in mind that this can be a sizable amount. For example, if your home costs $200,000.00, you will be required to make a $40,000.00 down payment on the home to avoid PMI.
  2. If your lender is motivated to sell you a loan, the lender may offer to pay for the PMI. This situation may be market specific and may not be available in all geographical areas.
  3. If you are a military service veteran, you may qualify for a loan through the VA. These loans do not generally require a PMI policy.
  4. You may be able to provide a 10% down payment if you were to “piggyback” loans together in order to purchase your home. Most commonly, you would have an 80% first mortgage, a 10% second mortgage and a 10% down payment. Not all mortgage companies will offer or allow this option. You will need to speak with your broker to see if this is a possibility.

In closing, it is important to know the costs and obligations that you are assuming when you take a mortgage on your home. Examine your documents carefully. If you do not understand the vocabulary in the document, ask, it may save you money.

If you’re concerned that your credit isn’t good enough to begin the home buying process, learn how you can start repairing your credit. Contact us today to get started.

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How to Pick the Best Type of Mortgage

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Guest Article by Lauren Ward from AAA Credit Guide.

It doesn’t matter if you’re a first time home buyer or picking out another place to call home: applying for a mortgage can be confusing. There are multiple types, and different lenders specialize in different lending programs. To help narrow down the search, here are the most common mortgages demystified according to your personal financial and credit scenario.

Low Credit Score and/or Low on Cash

If your credit score is less than perfect or you don’t have a lot of cash on hand to make a down payment, consider an FHA loan. This type of loan is backed by the federal government, so lenders are able to use slightly less restrictive qualifying guidelines. For example, the minimum credit score is just a 580. With that score, you can pay a down payment as little as 3.5% of the home’s purchase price, which is much less than the traditional 20%.

One downside of the FHA loan is that you’ll have to pay mortgage insurance. You’d have to pay this with any mortgage with less than a 20% down payment, but FHA loans work a bit differently. First, you’ll need to pay an upfront premium at closing, amounting to 1.75% of your loan amount. So if your loan ended up being $100,000 you would pay $1,750 as part of your closing costs.

Then you’d also be charged an annual fee, ranging between 0.45% and 1.05%. But instead of paying it all at once, it’s divided up over your monthly payments. On that same $100,000 loan with the highest fee of 1.05%, you’d end up paying $1,005 per year. That comes to an extra $83.75 on your payment each month.

If you put down 10%, you can have your FHA insurance cancelled after 11 years. Otherwise, you’d have to refinance into another loan at some point down the road in order to get rid of it. But depending on your goals and your local rental market, you could still benefit from an FHA loan.

Cash for Closing, Decent Credit

Most lenders offering conventional loans expect a credit score of at least 620, although some may still take a 580. But if you have better credit and some cash for closing, this is definitely a mortgage worth considering. You may actually be able to get a conventional loan with a down payment as small as 3%, but traditionally, you need at least 5%. Again, it’s about the individual lender you decide to work with.

You’ll still have to pay mortgage insurance with a conventional loan with less than 20% down, but it’s typically much lower than FHA loans. Depending on your credit score and other qualifications, however, you might notice a higher interest rate. So you have to compare your terms holistically to find the best choice. One important point to note is that with a conventional loan, you can cancel your mortgage insurance once you have 20% equity in your home.

Country Living with Zero Cash

If you want to buy a house without having to put any cash down, you can do so with a USDA loan. The catch is that you have to buy a house that is located in a designated rural area. The nice thing, though, is that the term “rural” is applied fairly broadly. You could very likely find a home near or in your town that is within a USDA-approved zone.

Rather than having ongoing private mortgage insurance, a USDA loan only charges a 1% upfront mortgage insurance fee that’s rolled into your loan amount. If you have a $200,000 loan, you could add your mortgage insurance to that to make it $202,000.

After that, you’ll have to pay a low annual fee of 0.35%. Like the FHA PMI, it’s divvied out over your monthly payments each year. However, the difference is that the fee is unrelated to your equity, so you’ll continue paying this fee unless you refinance into a different type of loan.

No Cash for Closing with Military Service

Veterans and active military members alike can take advantage of a VA loan, which also requires a 0% down payment. Credit requirements usually start at 620 for most lenders. Additionally, instead of paying PMI, you’ll pay a funding fee.

For your first VA loan, you’ll pay 2.15% of the home’s purchase price. For subsequent moves using a VA loan, your fee jumps to 3.3%. It’s important to work with a VA-specific lender because you’ll need a Certificate of Eligibility in order to qualify. A qualified lender can help you get the right paperwork together quickly and easily.

Choosing the right type of home loan can help you buy a house in a way that best suits your own situation. Whether your credit is weak or you have limited funds, home ownership doesn’t have to be a pipe dream. There are plenty of mortgage options that could make your dream come true.

 

 

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Can Refinancing a Mortgage Hurt My Credit?

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Refinancing your mortgage presents a great opportunity to save money by lowering your interest rate and monthly payments. If interest rates have fallen since you originally obtained your mortgage, or you’ve diligently worked on repairing your credit and improving your credit score, you might benefit from exploring your options for refinancing.

Before you do, it’s important to consider if refinancing could potentially hurt your credit. The way refinancing affects you depends on a few different factors. Let’s take a look at what refinancing is and how it can impact your credit.

What is refinancing?

The process of refinancing pays off your existing loan with a new loan. People commonly refinance to take advantage of better interest rates that will lower their monthly payments and save them money throughout the life of the loan. Refinancing is most commonly associated with mortgages but you can refinance any number of loans, including car loans, student loans, and personal loans.

How refinancing affects your credit

When applying for a new loan, the creditor checks your credit report with what’s called a “hard inquiry.” Hard inquiries lower your credit score by a few points. If you shop around for rates and creditors make multiple hard inquiries, this could negatively impact your credit score — unless you’re smart about it.

FICO treats multiple loan inquiries of the same category (auto, mortgage, student, etc.) in a short period of time as a single inquiry. If you shop around for rates but find the right loan within a specified period of time, your score will only be affected by a single inquiry. Keep in mind however, that this applies to rate shopping rather than applying for multiple new credit lines, such as credit cards.

Here’s where it gets a little complicated. The specified period of time varies depending on which version of the FICO formula the creditor uses. In the latest version of the formula, borrowers have 45 days to find the best rate. However, the period is only 14 days for older versions.

Refinancing also results in closing an old loan account and opening a new one. This means you’ll lose your payment history for the previous account in some credit reports. Since payment history makes up 35 percent of your FICO score, this could have a negative impact. Other reports and score models will continue to include your payment history for the closed account, which will result in negligible impact on your credit.

Should you refinance?

It always pays to consider how a financial decision will affect your credit score. In the case of refinancing, the benefits of lower interest rates and lower monthly payments far outweigh the negligible negative effects the process will have on your credit. The minor impact of hard inquiries on your credit report will fade over time as you build payment history with your new, refinanced loan, and benefit from extra money in your pocket.

If you’re interested in refinancing but are concerned about your credit report, the attorneys at Lexington Law understand consumer protection laws and legal rights. We work to ensure your credit reports remain fair and accurate.

Contact us for a free credit repair consultation, including a complete review of your credit report summary and score.

 

 

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How to Get the Best Mortgage Rates Possible

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Buying a home can be a stressful time full of tough decisions and harsh realities. Many people don’t take proper steps before beginning the mortgage application process. This can result in higher rates, more fees, and can overshadow an otherwise exciting step in a family’s life. Taking a few small steps now to plan for a mortgage later could save you thousands of dollars over the life span of a mortgage. There’s no simple way to guarantee the perfect mortgage rate on the perfect house, but there are a few ways you can plan for success:

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