Stetson Lowe - UTAH MORTGAGE BLOG

How Much Should Your Down Payment Be?

When looking for the right home loan, a major consideration may be the amount of money to put down to purchase the property. After all, the amount of money you can afford to put down will significantly affect your monthly loan repayments, the size of the loan, and the type of loan you qualify for. 

 

Due to the rapidly changing Home Loan rules and guidelines I thought it would be helpful to post today on some of the down payment standards and options for home buyers.

In general, it's ideal to come up with 20 percent of the price of the home. This means that if you want to buy a home for $200,000, you will need $40,000 as your down payment. If you can come up with at least a 20 percent down payment, you can not only keep the cost of your monthly payments down, but also achieve a lower interest rate on your loan. The primary reason for this is that you are creating equity in the home and if you default on the loan, the bank will get the majority of its money back. This incentivizes the bank to give you a more attractive interest rate.

Because many people have difficulty coming up with at least a 20 percent down payment, many lenders will allow people to contribute a smaller down payment towards the purchase of a home. Today, many lenders accept as low as 5 or 10% percent of the purchase price in the form of a down payment. This is approved by Fannie Mae and Freddie Mac for most conforming loans.

It is important to remember that when you only put down 5 percent rather than a full 20 percent of the home price, your interest and principal repayments will be considerably larger. As such, you might need to accept a cheaper home and smaller loan to be able to afford the monthly payments.

If you don’t have any money for a down payment, it may still be possible to obtain a NO money down loan. Some of the 100% financing options include:

VA (veteran’s administration)

USDA (rural development)

Utah Housing 

There are very specific criteria that you as a borrower would have to meet for each of the above mentioned loans including being a veteran for the VA loan, living in rural Utah (including Saratoga Springs and Eagle Mountain) or having a lower income to qualify for Utah Housing.   

Coincidentally very few Mortgage Brokers are approved to originate all of the above mentioned loans.  I am licensed and approved to provide you with all of these 100% financing options, I would be happy to provide you with a quote so give me a call today 801-655-5111.

When considering purchasing a new home, definitely take into account the amount of money you can put down. The more money you put down the less your loan repayment and overall loan cost will be.

Stetson Lowe – The Mortgage Insider – UtahLoanTips.com

What is "Private Mortgage Insurance" and who needs it?

If you're planning to take out a home loan you may have heard the phrase “private mortgage insurance” thrown around. So what is it and who needs it?

In general, a lender will require you to obtain private mortgage insurance when your home loan is worth more than 80 percent of the purchase price or appraised value of the home.

Basically, most lenders consider the ideal borrower as someone who can fund 20 percent of the home price. This shows that the borrower has significant “skin in the game” - by investing a significant amount of money in the home they demonstrate a high level of commitment to the home and to meeting their loan repayments.

Moreover, it means that should the borrower default on the loan they will have equity in the home which then can be sold and used to pay off a good chunk of the outstanding mortgage. Accordingly, by lending to such a borrower the bank is taking less of a risk than if they lend the same amount of money to a borrower without such equity.

However, the bank won't necessarily refuse to lend to you if you have less than a 20 percent down payment. What they will do to reduce their risk is to require you to purchase private mortgage insurance!

Private mortgage insurance or “PMI” provides security for the bank in assuming the risk associated with lending to someone with less than a 20 percent down payment. This is because if the homeowner purchases PMI and they default on the loan, the insurance company will kick in and continue making interest payments to the lender and in cases of complete foreclosure the insurance company may also be required to pay any deficiency balance that was not covered when the home was sold at auction.  This type of insurance policy all but guarantees the lenders will not lose money on a loan with PMI.

The Federal Government has established regulations governing the imposition of PMI since it presents a significant additional expense for consumers. In particular, the Homeowner’s Protection Act specifies particular rules that lenders must follow in relation to private mortgage insurance. These rules are designed to protect the borrowers and save them money. For instance, when a lender requires you to obtain PMI they must inform you of the amounts you must pay, when you must pay these amounts, the date you can stop paying them, when the PMI will automatically be canceled, your rights to terminate the PMI, and a phone number you can call to cancel the insurance.

Although many home buyers who borrow more than 80 percent of the purchase price of a home must buy PMI, there are also other circumstances where you will also have to pay for such insurance. The most common instance is where you have a poor credit score. A poor credit score means that you are a higher “credit risk” to the bank, such that they will desire you to have PMI.

So how much does private mortgage insurance cost and when do you need to pay it? Well, you will typically be required to pay around .5 percent of the total loan value for PMI. What's more, a lender will usually want the entire first year's premium up front at the close of the home purchase. So if you have a loan of $200,000, your PMI will cost around $1,000. In most cases, you will need to continue paying for the private mortgage insurance until you have paid at least 20 percent of the loan value down. Once you have built this level of equity in the home you will no longer be required to pay for the insurance.

Despite the additional expense presented by PMI – and the obvious attraction of having at least a 20 percent down payment – PMI is not all bad news. In fact, it may be a small price to pay to get into home ownership earlier rather than later. However, it's best to discuss the best strategy – whether it's saving a larger down payment or using a smaller down payment and buying PMI – with your mortgage planner.  Reply to this post under the comments section with any questions you may have concerning PMI.  For an independent review of your current PMI and when you can plan to cancel it email me at stetsonlowe@gmail.com.

Here is a link to a PMI company that I use to quote PMI rates you can shop for your own PMI using their easy pricing engine.

 

In my first few years in the mortgage business I rairly originated a loan with PMI because it was cheaper to do an 80/20 loan.  With the passing of these 80/20 loans PMI is something we are all having to come to terms with.  I hope this post will help you understand the basics of PMI.  The dreaded insurance that WE have to pay for that only BENEFITS the dang lenders!

 

Keeping you informed,

 

Stetson Lowe - The Mortgage Insider - UtahLoanTips.com

First Time Home Buyer Tax Credit

I have been receiving a lot of calls lately about HR 3221 and more specifically about the $7500 First Time Home Buyer Tax Credit.  As The Utah Mortgage Insider it is my duty to post about it today and answer everyones questions about exactly who qualifies and how it works.

Anyone who has not owned a home during the last 3 years falls into the governments definition of a first time home buyer and would therefor qualify for the tax credit.

The tax credit is not a typical tax credit, it is set up as an interest free loan of up to 10% of the purchase price of the property (not to exceed $7500).  This tax credit (should you choose to receive it) will come to you as a credit on your filed income tax return.  For example if you are a first time home buyer by definition and you are owed a tax refund from the IRS of $2000 and you have purchased a home between April 8, 2008 and July 1, 2009 then you are entitled to a refund of up to $9500.

The $7500 tax credit is an interest free loan for 15 years with payments made each year when you file your taxes.  The minimum payment due each year is $500.  If one chooses to pay the minimum each year the interest free loan will be paid in full in 15 years.  If at anytime during those 15 years you should sell your home or cease to occupy the home as your primary residence, the balance of the loan becomes due.

There are some income restrictions for qualifying for the credit.  Singles making up to $75,000 and married couples making up to $150,000 qualify.

Should you take the money?

Sure when I was a first time home buyer there where many things I could have used the money for, here are a just a few you may want to consider: Home improvement (if you purchase an older home, things that add the most value are bathroom remodels and square footage additions), build your slush fund for unexpected expenses, fund an IRA, or pay off a high interest rate credit card.

You can't beat interest free but just remember that it is a loan and not free money all together.

For more information

As always consult your CPA or Financial Planner for professional tax and investment advice.

Thanks for your calls and emails.  Feel free to call me with any of your mortgage questions at 801-655-5111 or email StetsonLowe@Gmail.com.

Keeping you in the Loop,

Stetson Lowe - The Mortgage Insider

Beijing Olympics 2008 Mens 4x100 m Event

If you only watch 1 event this entire Olympic games you MUST watch this amazing 4 x 100 m mens Olympic relay race.  This is an instant classic and may go down as the biggest come back win in this years games.  Enjoy

Click here to watch the replay http://www.nbcolympics.com/video/share.html?videoid=0811_HD_SWB_HL_L0194

More insider mortgage information to come very soon.  Stetson