New FHA Streamline Rules Help Make Refinancing Easier

Effective June 11th 2012, new rules regarding FHA Streamlines will help some borrower refinance into lower rates.

While everyone is well aware of mortgage rates being at all time lows, access to those low mortgage rates remains tight, with credit score minimums,  increasing mortgage insurance premiums and falling home property values.

In the Midwest, St. Louis, Kansas City, and Indianapolis, home values have not been hit as hard, but still, many customers who make their mortgage payments on time have missed out on the benefits of these low rates because of inability to qualify.

Specifically, for those who have a HUD backed mortgage, increasing mortgage insurance premiums have become the largest obstacle to helping borrowers take advantage of lower rates, having gone through numerous premium increases as rates have fallen in recent years.

However, effective June 11th, 2012 some who have paid their FHA mortgage on time will have the opportunity to cheaply save money by lowering their rate, and mortgage insurance premiums(both upfront and monthly)

In order for a borrower to qualify, the following will be needed:

  1. Must have an existing FHA mortgage endorsed prior to May 31st, ,2009.(Endorsed, not closed)
  2.  Mortgage must be paid on time.
  3. May be done without an appraisal.

Upfront Mortgage Insurance Premiums (UFMIP) will be reduced from 1.75% currently being charges to .01%(yes. 01%)

Monthly premiums will be reduced from 1.25% on 30 year mortgages over 95% LTV to .55% on most loans.

So What does that translate to?

About $100 on a $175,000 30 year fixed rate refinance compared to today’s FHA mortgage insurance tables.

What is an ARM? Should I consider getting an ARM?

Adjustable Rate Mortgages (arm)

An ARM loan or Adjustable Rate Mortgage,  is a mortgage with a rate that can adjust. While the term has been vilified as one of the causes of the dreaded, “mortgage meltdown”, not all ARM’s carry mortgage rates that are unreasonable. Just like most anything, all it takes is a little effort to understand the different ARM programs and to see if they would be beneficial to you./wp-admin/post.php?post=669&action=edit#

To understand an ARM correctly, we need a few definitions along with our example:

John, in Chesterfield Missouri, has a mortgage application that has a start rate of 2.50%, 5/1 ARM with 5/2/5 “Caps”, and 2.75% “Margin” with the 1 Year US Treasury as the “Index”.

Index

An Index is a guide used to measure interest rates. Examples of interest rate changes are, 1 year LIBOR(London Interbank Offered Rate, 1 year treasury, and Prime).  This is available on any financial website. Your interest rate is computed based on the index, the month before your adjustment period ends.

Margin

An easy way of thinking of Margin is as the lender’s markup on funds.  It’s added to the index. If you don’t know your index, its normally available on your note, or ask you loan officer if you are yet to close. This is where you need to pay close attention. Abusive lending practices were introduced into margins. A normal margin is about 2.75%, however during the time where the causes of the mortgage meltdown happened, some margins were as high as 8%.

Adjustment Period

The adjustment period is the disclosure of periods the rate is fixed before it adjusts. In our example, John from Chesterfield Missouri mortgage has a 5/1 ARM means the interest rate is 2.5% for the first 5 years, adjusting on the 61st month, then every 1 year thereafter.

Interest rate Caps

Cap on a mortgage discloses the maximum percentage an ARM can adjust per period and over the life of the loan, or “Capped”.  For example, the 5/2/5 caps means John in Chesterfield’s ARM can’t adjust to more than 7.5% on the first adjustment, no more that 2% per year thereafter, and no more than 7.5% over the life of the loan. Again, this is also a place to pay close attention. ARM caps are there to protect the consumer against unreasonable interest rate jumps. A normal ARM cap for the 1st adjustment is 2-5%. During the pre-mortgage meltdown days, we saw no cap and a life cap of up to 18%!

So How is my ARM rate computed?

Index + Margin = Interest rate, limited by the interest rate cap.

So, using our example above.  John from St. Louis (Chesterfield) has had his ARM mortgage for 5 years now and the US Treasury is at 1%.  So Index of 1 + margin of 2.75=3.75% will be John’s new interest rate for the next 12 months.

When Should I choose an ARM?

Provided this isn’t your first rodeo owning and financing a home, you could consider and ARM if:

  1. You plan on being in your home for the a time period less that the fixed period of the ARM. Say, if you are planning on moving in 4 years, a 5/1 ARM may work well for you.
  2. You have additional income coming in soon. Say, you are first in line for the next promotion and Junior’s college fund has not yet been fully funded.

So, to conclude, ARM’s aren’t for everybody, and they can have some tricky parts. However, provided you’ve done your research, they can be of benefit in the right circumstances.

 

What is Private Mortgage Insurance and why am I paying it?

Clinically put, Private Mortgage Insurance, or PMI or MI, is insurance that will help to protect a lender from loss in the case of a default by the borrower. MI is almost always required on loans with less than twenty percent equity. That means, if you are purchasing a home with less than twenty percent down or refinancing to more than eighty percent of your home’s value, you will be required to pay mortgage insurance. While it is a payment that the borrower pays to insure another party, it does have its benefits.

How is mortgage insurance charged?

There are a couple of ways MI is charged. There is Monthly MI, which is computed based on various factors such as credit score, LTV(Loan to Value), and term, then there is MIP(Mortgage Insurance Premium) which is charged up front, and most of the time added to the loan amount. Some programs charge one or the other, while some, (Gulp) charge both. In some cases, there is an add on to the interest rate which pays the premium, called Lender Paid MI. (LPMI)

Why should I pay MI?

Simply put, if you don’t have 20% to put down on a mortgage when you purchase or refinance, then be happy you get to pay MI. For example, in Kansas City and St. Louis, the average home sales price is right at $145,000. I don’t know about you, but I didn’t have 20% down ($29,000) sitting around in my checking when I purchased my first home.

Having MI to purchase a home allows most buyers to get into a home with as little as 2.5% down in some cases. So without the benefit of MI, purchasing a new home would be very difficult.

However, here are some tips to be as efficient as you can with the premiums you pay.

How to pay as little MI as possible

  1. Save as much money as you can. The larger the down payment, the lower the MI, and/or MIP.
  2. Keep your credit score as high as possible. Remember, the minimum score to get a home loan these days is 640. The higher the score, the lower the MI.

How to get out of paying MI if you are already paying

  1. Most MI contracts cancel when you pay the loan amount down to 78% of the original value of the home at purchase or value on the last refi. However, that takes almost 10 years if you put down 5%.
  2. The 2nd way to get out of paying MI, is by refinancing your home assuming you have built up 20% equity through a combination of principle payments and appreciation. However if you are content with your existing loan, you should call your lender to see on what conditions they will cancel your MI.

To summarize, while MI is a premium you pay to insure someone else’s interest, it helps people buy homes and refinance homes with less that 20% equity and with some good planning and discipline, there are ways to keep the premiums to a minimum.