The Pros and Cons of PMI (Private Mortgage Insurance)

Save-Home1PMI, or Private Mortgage Insurance, provides lenders with a way to protect their investment in your loan in case you default. But even though PMI is meant to protect the lender, it can also provide benefits for the borrower. Read on to learn the pros and cons of PMI so you can be an educated and informed borrower!

The Pros of Private Mortgage Insurance

  • PMI allows for lower down payments
    One of the most common reasons why borrowers benefit from PMI is that they are able topay a smaller down payment for their new home. PMI is usually required when the amount of the loan is greater than 80% of the value of the home. So, if you aren’t able to save 20% now for a down payment, but still want to take advantage of the current great rates, PMI might be a good option for you.
  • PMI is tax deductible.
    Unlike homeowner’s insurance, the premiums you pay for Private Mortgage Insurance are tax deductible. Just make sure your deductions are itemized, as with all of your home ownership deductions.

The Cons of Private Mortgage Insurance

  • Overall Cost
    The average cost of yearly Private Mortgage Insurance premiums can be between 0.25 to over 1 percent of the total amount of the loan. This example may help to put these costs in perspective: Let’s say you are able to pay 10% down for a home that costs $150,000. The balance of your loan will be $135,000. Based on the aforementioned percentages, that would make your monthly PMI premiums approximately $56 to $113 a month, which is on top of your monthly mortgage payment, taxes, and homeowner’s insurance. It’s important to keep these added costs in mind when taking a close look at your monthly budget.

insurancAs an experienced mortgage lender in the Kansas City area, I’ve helped hundreds of borrowers with the decisions surrounding Private Mortgage Insurance and how to best mitigate its overall cost. It all depends on your specific situation. I am here to answer any questions you might have about PMI or the lending process in general. Just give me a call!

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What is a Debt-to-Income Ratio?

debt and incomeA Debt-to-Income Ratio is a one of the tools used by mortgage lenders to determine if a borrower will be able to maintain payments on a specific property. While this calculation is only one of the factors considered by the lender, the Debt-to-Income Ratio can help to measure how much of a burden the monthly mortgage payment may be on the homeowner.

A Debt-to-Income Ratio compares a borrower’s monthly debts to their gross monthly income.

To calculate a potential borrower’s gross monthly income, a lender may look at itemized tax deductions and bonuses in addition to their “take-home” pay.

To calculate a potential borrower’s debt, lenders consider “front-end debts” (for example, monthly credit card payments, car payments, alimony payments, and student or personal loan payments). Lenders also look at “back-end debts” (this includes the mortgage payment and any other monthly housing payments, such as homeowner’s insurance or real estate tax). Lenders will then combine the borrower’s front- and back-end debts to find the total monthly debt. Then the monthly debts are divided into the monthly income to find the Debt-to-Income Ratio.

home-buyingWhat is a “good” Debt-to-Income Ratio?

Most mortgage programs require borrowers to have a Debt-to-Income Ratio of 43% or less. But it’s important to keep in mind that lenders look at other features that could outweigh the Debt-to-Income Ratio, such as making a large down payment or having a very high credit score. There are also some loan programs that don’t place as much focus on the Debt-to-Income Ratio. Examples of these programs include FHA, HARP, and VA refinancing programs.

percentageIn addition to being an essential tool for mortgage lenders, a proper understanding of a Debt-to-Income Ratio can be extremely helpful for homeowners even after the initial purchase of their home. Keeping track of your Debt-to-Income Ratio can help you with budgeting for long-term saving.

I’d be happy to answer any questions you may have about Debt-to-Income Ratios and other factors I consider when working with borrowers. Please contact me to learn more.

How Low-Risk and High-Risk Traits Can Affect Your Mortgage Rates

riskIt’s certainly great news that mortgage rates have dropped to their lowest levels since May 2013. However, there are additional factors that will affect the mortgage rate for your specific loan.

To arrive at an appropriate mortgage rate for your loan, banks and lenders look at multiple factors. One of those factors is your credit score. Borrowers with high credit scores will most likely be offered lower mortgage rates as well as more choices in types of loans.

Besides credit scores, banks and lenders will carefully consider additional factors to determine if your loan may be high- or low-risk.

Low-risk borrower traits include:

  • a history of on-time payments to creditors
  • mortgaging a single-family, detached home
  • mortgaging a primary residence.

warning-33364_640High-risk borrower traits include:

  • a history of late payments to creditors
  • mortgaging a multi-unit home or condo
  • mortgaging a vacation home or second property

While these traits provide the bank or lender with a basic idea of your risk factors, it is important to understand that none of these traits on their own completely predict the mortgage rate you will be offered. For example, you could be asking to borrow for a vacation home (a typically high-risk trait), but with a decent credit score and other attributes, your mortgage rates could be completely reasonable.

Another aspect that can affect your mortgage rate is the type of loan you are considering (conventional mortgages, VA loans, FHA loans, USDA loans, etc). Conventional mortgages usually carry the highest mortgage rates in comparison to the others.

Risk2As an experienced lender, I am happy to answer any questions you many have about mortgage rates and other mortgage issues. Please feel free to contact me anytime to learn more about the mortgage process and to start your journey to home ownership.

Refinancing from a 30-Year into a 15-Year Fixed-Rate Mortgage

If you’re looking to refinance your 30-year mortgage, you might consider refinancing into a 15-year mortgage. You’d be in good company; according to recent refinancing data, 30% of homeowners who refinanced their 30-year fixed rate mortgage in the last quarter decided to refinance into a 15-year loan. For homeowners who are comfortable paying a higher monthly payment, a 15-year mortgage can save a homeowner money in the following ways:

  1. refinancing 30 to 1515-year mortgages almost always have a lower interest rate and APR than 20- or 30-year mortgages. This means you’ll be paying less money in interest to the bank.
  2. After 15 years, your mortgage will be paid in full, which means you won’t be paying interest as long as with a 20- or 30-year mortgage.

To put this in perspective, let’s consider an example from an article at themortgagereports.com:

“At today’s mortgage rates, assuming a loan size at the national average of $268,500, homeowners with a 15-year loan will pay $199,999 less mortgage interest as compared to a comparable 30-year fixed rate mortgage– a savings of 64%.”

These numbers look pretty attractive, especially to homeowners who could then put those savings towards their child’s college tuition or their own retirement funds. But can you afford the higher monthly payments that come with a 15-year mortgage? I’ve provided an easy-to-use mortgage calculator on my website to help in your decision. Click here to compare 15- and 30-year mortgage terms to get a better idea of your monthly payments.

For a more detailed analysis, or more information about other refinancing options, contact me today. My goal is to provide each of my clients with expert advice and to help find a refinancing solution that is right for their specific situation. I look forward to hearing from you!

What You Should Know About Accelerated Mortgage Payments

Interested in learning about accelerated mortgage payments? If you have a 30-year fixed-rate mortgage, you could save on interest payments by paying off your mortgage early. Here are a few things you’ll need to look into when considering mortgage prepayment.

  1. accelerated mortgage paymentsConfirm your mortgage interest rate. Look on your monthly statement, or call your mortgage lender to inquire.
  2. Does your mortgage have the highest interest of all your investments? If so, paying early towards your mortgage may be a good choice. However, if you have other investments with higher interest rates, you may wish to take care of those first.
  3. Check your mortgage agreement for prepayment fees, which change from loan to loan and include any possible fees in your decision making calculations. These fees might cancel out any savings you’d make from paying your loan off early.
  4. Go over your budget. Be sure to run the numbers so you know how much extra you can put towards your mortgage.
  5. If you decide that you’re ready to make accelerated payments, contact your lender. You could pay a fixed amount, adding a percentage to your monthly mortgage payment. Or you could prepay lump sums if you receive a gift or cash in on an investment. Alternatively, you may wish to pay your mortgage biweekly, giving you an extra payment every year. Check out my bi-weekly payments calculator that lets you compare a typical monthly payment schedule to an accelerated bi-weekly payment.
  6. Be sure to confirm your prepayment request in writing, and check your mortgage statement regularly to confirm your payments are paying down your loan’s principal.

If you have any more questions about accelerated mortgage payments, please contact me for assistance. As a local mortgage lender, I specialize in providing professional mortgage guidance to the Kansas City community. From new home purchases to refinancing existing home loans, I always have my clients’ best financial interest in mind.

Should You Pay Off Your Mortgage Early? Maybe Not…

The secure feeling of owning your home outright, without monthly payments over your head, seems like the ultimate goal in home-ownership, right? With your mortgage paid off, you can finally breath free…or can you? An informative article in The Fiscal Times presents a few things to consider before you decide to pay off your mortgage early.

The money you spend on paying off your mortgage may be better spent on paying down other debts you might have, especially those with higher interest rates. At this point, mortgage rates are still low (the average 30-year fixed loan is at about 4.2%), while the national credit card interest rate is much higher (national average APR is 14.92%). The article also points out that credit card debt interest is not tax deductible, but your mortgage interest is.

It’s also a good idea to contribute the maximum amount to your retirement plan before paying off your mortgage. If you’re still working, put those extra earnings into your IRA or 401(k) before you consider putting that money towards paying off your mortgage.

While prepayment penalties are less common than they used to be, it’s important to make sure you won’t be penalized for paying off your mortgage early. Don’t miss any of the fine print!

Consider other important investments in your and your children’s future. Once you’ve worked towards reducing your credit card debt and contributing to your retirement, look into college savings plans and other tax-free investments. If you’d like to learn more about investments that might be right for you and your family, contact me at any time. I’m here to answer any questions you may have and provide clear and concise information to help you move forward with a smart investment and other financial planning.

 

 

Finance AND Renovate Your Home with a 203(k) Loan

203k-11Are you interested in purchasing a fixer-upper? Or maybe you want to finance some upgrades for your home? The U.S. Department of Housing and Urban Development has created the FHA 203(k) home loan program for borrowers looking to finance and renovate their home. The 203(k) is a single home loan with a long-term fixed or adjustable rate that is used to both finance and rehabilitate the property. Borrowers may use the 203(k) program to purchase and rehabilitate a home; purchase a home, move it to another site, and rehabilitate it; or refinance an existing mortgage to rehabilitate the property.

Streamlined 203(k) loans are typically best for a majority of the situations I encounter.

How_to_Add_Value_to_a_Home_Through_Renovation_7956772_460The Streamlined Loan is intended for homes in need of minor repair. It allows borrowers to finance the purchase of a home and make improvements or upgrades costing up to $35,000 prior to moving in. With the streamlined loan, there are no minimum repair costs, and the borrower must occupy the property as their principle residence.

exterior11A few of the eligible improvements with a 203(k) Streamlined Loan include: repair or replacement of roof, gutters, and downspouts; repair, replacement, or upgrade of existing heating, ventilation, and air conditioning systems; interior and exterior painting; purchase and installation of appliances; basement finishing and renovation or addition of exterior decks, patios, and porches; window and door replacements; and more.

There are a few general requirements for the property to be eligible for a 203(k) loan. The property must be a one- to four-family dwelling, and construction must have been completed for at least one year. The loan may be used to convert a one-family dwelling into a two-, three-, or four-family dwelling, or a multi-unit dwelling may be decreased to a one- to four-family unit.

To learn more about 203(k) loans, contact me by email or phone. As an FHA-approved 203(k) lender, I am experienced and ready to work with you to achieve your home ownership goals.

The FICO Credit Score Recalibration and its Potential Benefits

credit-scoreFair Isaac, the company in charge of configuring the FICO credit scores, announced earlier this month that it would soon begin recalibrating the way credit scores are calculated, potentially making it easier for millions of people across America to get loans. After a report from the Consumer Financial Protection Bureau found that many peoples’ credit scores were unfairly downgraded from certain types of debt, FICO decided to take a closer look at the way credit scores are configured.

The FICO Credit Score Recalibration: What’s Changing?

FICO Score 9, the newest edition of FICO’s general credit score model, contains changes in the area of debt collection. The FICO credit score recalibration includes dismissing late bill payments as a negative to a person’s score, as long as those bills have been paid or settled with a debt collector. The new score will not include paid collection accounts as a negative either. Another significant change coming with the FICO credit score recalibration is that medical and non-medical debt will now be differentiated, with unpaid medical bills having less of effect on credit scores.

The FICO Credit Score Recalibration: Why the Changes?

medical-bill-stethoscope1

This FICO credit score recalibration is going to be implemented largely because the company, and nation as a whole, has begun to see medical debt as generally beyond a person’s control. Unpaid rent or utility bills can usually be avoided, but with the unpredictability of an illness or injury, along with the high cost of healthcare, unpaid medical bills may not correctly reflect a person’s ability to make payments. The other change coming with the FICO credit score recalibration, dismissing paid collection accounts, is a sort-of reward to people who pay off their debt.

buying-a-homeThe FICO Credit Score Recalibration: The Benefits to Home Buyers

FICO believes that this credit score recalibration will more accurately predict a consumer’s behavior and risk to potential lenders. The FICO credit score recalibration is set to be fully implemented this fall and many are predicting that some people could see a boost in their credit score, especially those with significant medical debt. If you are interested in buying a new home, the FICO credit score recalibration may have some additional benefits to you. Be sure to contact me today or click here to get started on prequalifying for a home loan. I am looking forward to working with you!

The Importance of Getting a Pre-Approved Home Loan

Many first-time home buyers might think the logical order of purchasing a home would be to first search for and decide upon a home, and then begin the loan process. Unfortunately for them, this is not the case. When a seller is considering bids, they will look for candidates that are already pre-approved or at least pre-qualified. This lets them know that the process of completing the sale will go smoothy. A seller might not even consider you without a lender’s pre-approval letter, and many realtors won’t show you properties without it.

What’s the Difference Between Pre-Qualified and Pre-Approved?

If you’re confused about the difference between being pre-qualified and pre-approved for a home loan, you’re not alone! Let’s straighten out this issue so you’re educated and prepared.

pre-qualifiedPre-Qualification is the estimation of your borrowing power. This is a fairly easy step and one of the first in the mortgage process. A lender like myself will evaluate the data you provide including your income, debt and assets. Pre-qualification does include analysis of your credit report. I offer free pre-qualification on my website. You can get started by clicking here. Once the evaluation is complete, we can discuss the type of mortgage that may be right for you.

pre approvedPre-Approval is issued by a lender after a comprehensive analysis of the creditworthiness of the applicant. This is the more involved, next step in the mortgage process. You will complete a mortgage application and supply me with documentation to run an extensive financial background check and review of your credit rating. I can then inform you of the specific mortgage amount for which you are approved.

If you have questions about the difference between pre-qualification and pre-approval, give me a call! You can start the pre-qualification process online by clicking here. Once you complete the form, I will contact you to help you with the next steps in your home buying process.

Steps to Mortgage Qualification

There’s a lot more to mortgage qualification than just steady income and sufficient funds. While the journey to mortgage qualification may seem overwhelming, there are plenty of steps you can take to improve your chances of qualification and better rates. Here are a few things to keep in mind as you prepare for your home buying journey.

approvr

Build Strong Credit

As you’ve heard, “credit is king” when it comes to getting a great mortgage rate. A low credit score can keep you from buying a home or from qualifying for an affordable mortgage rate. Fortunately, there are clear steps you can take to improve your credit score.

  1. Request your free credit score. It’s important to be informed as you begin this process. You can request your free credit report at AnnualCreditReport.com. You might be surprised at the results! Look for inaccuracies and get those taken care of right away.
  2. Pay off past-due bills. Take strides to pay every bill on time and reduce the balances on your credit limit on your accounts.
  3. Establish steady credit accounts. Limit yourself to three to five credit accounts such as a car payment, gas card or student loan. Accounts with histories of one year or longer are best. Remember, keep the balances as low as possible and pay the bills on time.

Save Cash

Start practicing paying your mortgage payments now! Set aside savings each month in anticipation for the mortgage payments you will have in the future. Lenders appreciate seeing that you have a pattern of savings, and you will be able to use these savings towards your down payment when it comes time to purchase your first home.

cash-jar

Reduce Debt

An important factor in loan approval is debt-to-income ratio, which compares minimum monthly payments on all debt to gross monthly income. Debts can include credit card payments, car loan payments, child support payments, legal judgments and other recurring debt payments, so be sure to reduce your balances as much as possible.

Educate Yourself

Don’t be afraid to visit open houses, even if you are not fully prepared to purchase a home within the next two years.

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By viewing homes for sale in your price range, you’ll gain a better understanding of home value. It’s even worth a few minutes of your time to see if you currently qualify for a mortgage. To see if you prequalify for a loan, just follow this link. As always, I am available for any questions you may have about mortgage qualification. Feel free to contact me for recommendations of fantastic realtors in the Kansas City area so you can start your home buying journey with the best professionals in the city.