If you were asked to make an investment in which you were told you would never see your money again, how much would you invest?

If you put money in a savings account each month, and the bank guaranteed you that you could never withdraw the money again, would you keep depositing checks?

If your savings account was only available to keep your bank from losing money, but you could still lose money, would you keep money in that savings account to protect your banker?

If you put money in an account that was guaranteed to never pay you more than 0% interest, would you want to save your money in that account?

What if the money in the 0% account could lose money, even if it couldn’t gain money?  How much would you put there?

What are these horrible accounts I am talking about?

Did you guess Home equity?

Think about it -

• When you make a big down payment on a house, you don’t get paid money each month by the bank for that, do you?
• When you send in extra principal payments, does the banker pay you interest?
• If your home loses value, does the bank lower your mortgage balance, or does your ‘Home equity Savings Account’ disappear?
• If you have a lot of equity, does that make your house go up in value?

Down Payments, Home equity and mortgage repayment or early payments are all questions regarding where you should store your wealth over the long term.  Equity in your house doesn’t make you safer or wealthier – it just sits there.

Big down payments are safe for the banker – not you!

Of course, you pay interest on money you borrow, but that is a choice – you can pay interest, and store your money elsewhere, or not pay interest, and maybe keep the bank from losing money.

Make sure your mortgage provider asks a lot of questions about down payment amounts and home equity before you structure your mortgage.

If you already are in a mortgage, get an annual checkup to make sure your mortgage is helping you to succeed financially, rather than helping the bank succeed.

So, you have a mortgage with PMI, or Private Mortgage Insurance.  How can you get rid of it?  There are a few ways, and you find, you are actually better off paying PMI than the alternatives.

In general, if you have a mortgage loan with PMI, you have to pay it until you get to 20%-22% equity in your house.  A few years ago, it was simply a matter of buying a house, waiting two years, and then getting an updated appraisal to have your mortgage servicer drop the PMI.  Not so simple anymore.

For FHA loans, you will have to carry PMI for a minimum of 5 years after you get your loan.  When the loan balance gets to 78% of the original sales price or appraised value, the PMI will automatically drop off.  If you paid extra principal payments on your mortgage and got to 78%, and at least five years have elapsed since you closed on the home loan, you can call your servicer, and they will remove the PMI charge.

For Conventional Mortgage loans, you only need the PMI for two years, but the loan servicer will not drop the PMI until you ask.

It used to be that you could get an appraisal done on your house and use the appreciation to cancel the PMI.  Most lenders changed that rule a few years ago as the credit crisis hit, so on conventional mortgages, it is similar to the FHA program – pay your loan down and then the PMI can be removed.

Three other options if you have PMI both involve refinancing your current mortgage.

1. If your house is still valued higher than you paid for it, you may be able to get a fresh appraisal and a new loan at 80% or less than the appraised value.  This new mortgage will not have PMI.
2. If you have 10-15% equity in your house, you may be able to refinance with a new mortgage combo – get an 80% mortgage and add on an equity line to cover the amount above 80% of your home’s value.  Equity lines can be really tough to get, but there are still a few lenders that offer them.
3. If you originally made a small down payment, say 0-5%, and now have more equity in your house, a refinancing to a new mortgage with more equity in your house will allow you to pay a lower PMI premium.  Combine the lower PMI premium with today’s lower interest rates, and this option may still save you money over time compared to your original PMI cost.

For the most part, people hate PMI.  However, don’t forget that PMI allows many people to buy a house and improve their quality of life years sooner than if they had to pay rent while saving for a 20% downpayment.  If you had to get PMI, dont’ regret that – just be aware of what you need to do to get rid of PMI.

If you need an updated amortization schedule, contact us, and we will create one for you free of charge.

A frequent question I get – what is the Jumbo Mortgage market like?

Over the past year, those who qualified for loans that conformed to Fannie Mae guidelines (Conforming loans), saw very low interest rates and pretty streamlined approvals – you just needed to have documented income, a down payment of 3.5% to 20%, and a credit score over 620. 

Jumbo loans in Charlotte and the Carolinas are very different however.  Banks are actually lending for Non-Conforming loan amounts, but they are actually acting like it is their money they are lending!  If you were going to lend someone $500,000 to $2,000,000 to buy a house, what would you want from them?

Banks are pretty unanimous in their answer right now. They want:

• Large down payments – share the risk of ownership with the home owner
• Great credit scores and credit history – only lend to someone with a history of paying back their obligations as agreed – on time.
• Documented Income showing the ability to repay the loan – if the IRS doesn’t think you made the money, the lenders won’t either.
• What is the house really worth?  Expect  a strict review of the appraisal, and the lender may even require two separate appraisals.
• Lastly, the banks prefer that you also share the risk of future interest rates – this means they will offer much better rates on Adjustable Rate Mortgages than on Fixed Rate Mortgages.

As an example, right now we have a lender that is offering a 5 year fixed rate mortgage with an interest rate of only 3.75%.  The not so fine print is that you need 25% down payment (share the risk of ownership), a 680 or better credit score, a two year income history that shows your new mortgage payment and all other debt payments will be less than 45% of your pre-tax income.

Change this loan to a 30 year fixed rate loan, and the interest rate jumps to 5.875% – and you need at least a 700 credit score.

Reduce the down payment to only 20%, and the rate jumps from 3.75% to 4.75%!

Jumbo mortgages are still available, and pretty easy to get.  Just remember that the lender wants you to share the risk by making a larger down payment and everything else needs to be ‘clean’ – credit history, income, property value.  For the right person, a 3.75% 5 year fixed rate makes the right house very affordable.