RedVelvetRealty.com: October 2014

I received this great information in an email today from one of the lenders that my clients have used in the past. I thought it was worthy of sharing with you!

In mortgage industry, the term Private Mortgage Insurance is quite familiar to all. Potential borrowers seek help from a financial firm to own their dream home. While getting that help, people facing cash problem might have to bear the extra burden of Private mortgage insurance policy. Let us discuss the ins & outs of this policy & try to learn the benefits from the point of view of both borrowers & lenders.

What is PMI

Private mortgage Insurance or PMI is basically treated as a risk oriented insurance policy or a risk-management instrument. In case of a mortgage loan , this policy saves the interest of lender if the borrower fails to make the due payments.

Why lenders prefer PMI

When a person applies for home loan, the lender first evaluates the financial condition of that person very specifically. If the person can’t afford the downpayment for at least 20% or do not have enough equity, then he is required to pay PMI along with the monthly payments. Usually, lenders ask borrowers to buy PMI for loans that are more than 80% of LTV or loan-to-value ratio.

The risk for the lender becomes greater when the percentage of the downpayment reduces. PMI allows the borrower to pay the downpayment as low as 3% and as high as 19.99%. Homebuyers with low cash in hand will be benefited by this process as they don’t have to gather a huge amount for obtaining the mortgage. PMI can be paid monthly or at closing (lender specific) till the home equity touches the risk free level.

Despite of the easy obtainable facility, borrower must also know some facts. They are paying a policy premium (PMI) which offers zero protection to them. This policy is mainly beneficial for the lenders as it is protecting the lender’s investment , not the property.

Types of mortgage insurance (MI) & who needs it

Home buyers with less than 20% downpayment in hand are required to purchase PMI.

There are the types of MI -:

a) Bought from Government – MI purchased from government & specifically designed for special loans like Federal Housing Administration (FHA), Veterans Administration (VA) etc.

b) Bought from private sectors – MI purchased from private sectors is called PMI. Typically PMI is meant for conventional loans only.

c) Lender paid – Mortgage insurance paid by the lender is called Lender Paid Mortgage Insurance(LPMI). Lender added up the cost of MI with interest rate. This is tax-deductible as it is financed by lender through interest payments.

Depending on the payment frequency, MI also can be categorized into the following segments :

a) Annual – Policy premium can be paid once a year. It can also be paid at closing only in 1′st year of the loan term.

b) Monthly – Generally the premium is payable in monthly basis. Upfront cost is lower but the monthly premiums are comparatively higher than others.

c) Single-premium – In this case, 3% to 5% of the loan amount is payable at closing. Policy must be remain in force till the loan is refinanced or equity reaches to 78% of the loan amount. Refund will be made for unused premiums.

The cost & payment method of PMI

The cost of PMI depends upon various factors. Notably, The amount of the loan is the main factor. The higher it is, the premium will also be high. The downpayment amount & credit score play a significant role in PMI cost determination. The cost increases gradually as both the said factors are lowered. Fixed rate mortgage has lower cost rather than adjustable rate mortgage. We can list up the factors as given below :

1)Credit score
2)Type of the property (primary, second or investment property)
3)Downpayment size
4)Term of the loan
5)Loan-to-value ratio(LTV)
6)Loan type (fixed or adjustable)
7)Loan amount
8)Lender’s preference of policy cover

Most homebuyers add up PMI premiums with monthly mortgage payments. The lender then pays the premium from the escrow account.

Cancellation of PMI

After making the monthly payments on time, when the equity value reaches 22% , the borrower can stop paying PMI. The lender must be notified about this along with a proof. An independent appraiser can be hired to get the report. At the time of this process, it is required to have the payment history that is void of 30 days/60 days delinquencies within 1year/2year of the cancellation request.

How to avoid PMI

Considering different aspects of PMI, the borrower who don’t like to obtain the option may choose some other steps to avoid it. These alternatives are :

· Look out for the VA loan option if you are a veteran. VA loans do not come up with PMI.

· Get help from family members like parents & submit 20% or more as downpayment.

· Choose to pay higher rate of interest. The excess amount from the monthly payment will be divided between the planned term of occupancy.

· Look out for special offers from the banks. These offers may be available to the special professional persons like doctors, teachers or lawyers.

· Choose combination loan that consists of first mortgage 80%, second mortgage 10% & down payment as low as 10%.

The PMI has its own unique advantages too. PMI helps to obtain mortgage with lower downpayment and this is it’s primary advantage. Lenders & insurers have flexible loan plans for local communities which is obtainable to the low income people. Lenders & insurers provide consultation which helps the new home buyers to predict the possible monthly payments. Aside from this, PMI also have tax savings opportunity on the annual tax returns. Easier cancellation process gives the chance to build co-ordination between borrower & the lender. Either of the two parties can inform the other about the increasing home equity.

After considering the above given advantages PMI has to offer, the prospective home buyer can find a breathing space in this competitive mortgage market.

Best Regards,

Eitan Shafshak

Mortgage Loan Officer

Tel: 702-998-9746

The Current Las Vegas Market

Closed sales for Year-To-Date 2014 remain 12% behind last year as we enter into October. The median sales price of an SFR improved a mere .8% to $201,600 while the average closed sales price dropped 4.5% to $239,185. It’s also taking longer to close escrows as the days on market (DOM) continues to increase. The average DOM for short sales increased to 169 days compared to 156 last month.

Overpricing Overview – October

It’s again time to address the overpricing issue head on! The average listing price of an available SFR Equity home is nearly $160,000 more than the average closed sales price. The average listing price of all available equity properties dipped to $411,926 compared to the average listing price of $337,704 for new listings. This market continues to carry a large number of older, very overpriced listings in inventory that do not have a prayer of selling anytime soon.

Current inventory levels increased to 3.5 months for SFR and 3.8 months for condos and townhouses. That means that a seller and listing agent will most likely only get one shot at pricing a new listing correctly. A year or so ago a seller might be tempted to list their home a few thousand dollars high and then “nibble” the price down over the next few days or weeks. Do NOT try that today!! It will most likely result in exposing the home to the correct buyers who will not respond to the over pricing. Then, once the price drops and corrections have been made – those buyers will probably no longer be available as they will have moved on to competing, but properly priced homes. Some communities may be better or worse due to supply and demand – which must be taken into consideration. However, do you really want to play Russian roulette with your listing? Or, is it better to price it to sell from Day One?

RedVelvetRealty.com

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