An FHA-to-Conventional Refinance May Allow You to Ditch MIP

While refinance applications seem to be taking a backseat to purchase applications, there are still some good reasons to refinance your mortgage, even if rates aren’t currently at their best.

First off, let me preface this with the fact that mortgage rates are still spectacular. Yes, the 30-year fixed used to be in the mid-3% range, but a rate of around 4% was relatively unheard of until recently (and is still available today).

Unfortunately, the recent increase in rates has dented refinance applications as the pool of eligible borrowers begins to dry up.

Today, the Mortgage Bankers Association noted that refis slid another 4% in the latest week, pushing the refi share of total mortgage activity down to just 42.6% from 44% a week earlier.

Most industry participants saw this coming, which explains the recent trend of mortgage companies cozying up with real estate agents. Hello Motto Mortgage and Redfin Mortgage, to name just a couple.

But there are still opportunities for both homeowners and mortgage lenders to pick up the refi slack.

Refinancing Out of FHA and Into Conventional


One such opportunity is refinancing an FHA loan into a conventional loan (such as a Fannie Mae or Freddie Mac loan), the main benefit being the removal of the mortgage insurance that must be paid on the former.

Thanks (or not thanks) to the FHA’s stringent mortgage insurance rules, the annual mortgage insurance premium (MIP) must be paid monthly regardless of whether the loan balance falls below 80% loan-to-value (LTV) unless the loan is a 15-year fixed or came with a 10%+ down payment. Or if it’s an older FHA loan.

Most FHA loans are 30-year fixed mortgages with minimal down payments, meaning MIP often stays in-force for all 30 years unless you refinance out of the FHA.

This adds to an otherwise low monthly mortgage payment, making even a great mortgage rate a little less attractive.

Many folks took out FHA loans several years ago to take advantage of the low 3.5% down payment requirement, and because home prices have increased so much since then, some of these borrowers may have the necessary equity to refinance into a conventional loan at 80% LTV or less.

Doing so will allow them to ditch the MIP and avoid PMI on the new conventional loan, which could equate to substantial savings.


Let’s take a look at an example:

Sales price: $300,000
Down payment: $10,500 (3.5%)
Loan amount: $294,566.25 (includes upfront MIP of $5,066.25)
FHA monthly MIP: $205.06

Instead of subjecting yourself to ~$200 in monthly mortgage insurance premiums, you might be able to refinance to a conventional loan at 80% LTV or less and rid yourself of that burden.

Tip: Note that the Upfront Mortgage Insurance Premium (UFMIP) is non-refundable if you refinance out of the FHA to a conventional loan. It may be refundable if you refinance to a new FHA-insured mortgage.

Two Things Need to Happen for the FHA-to-Conventional Refinance to Make Sense

Not just anyone can take advantage of this type of refinance. Only those who have gained enough equity and who can obtain a comparable (or better) mortgage rate will win here.

Using our example, the home must now be worth X amount to get that LTV down to where it needs to be. I say X because it depends how long you’ve had the loan.

A combination of home price increases and the natural amortization of the loan will tell you what the value needs to be.

The loan balance above would drop to $277,000 in just three years, requiring a house value of $346,250 to get the job done.

Fortunately, home prices have surged in the past several years, so for many lucky borrowers the appreciation alone can push a relatively young loan to the magical 80% LTV mark upon refinancing.

Assuming you’re good to go there, you’ll need to consider the mortgage rate. That is, your former mortgage rate and the refinance mortgage rate.

If you previously had a rate of 3.75% on a 30-year fixed, and the best available rate today is 4.125%, you have to take into account that .375% bump in rate.

The good news is that it shouldn’t affect the mortgage payment by too much.

The old principal and mortgage payment was $1,322.73 plus $205.06 with MIP, making it $1,527.80 out the door (don’t forget taxes and insurance too!).

If the rate were 4.125% instead, the monthly P&I payment would be (based on a slightly lower outstanding balance of $277,000) $1,342.48.

Yes, it’s a bit higher than the old P&I payment, by around $20, but you no longer have to pay the $200 in MIP. That’s a significant amount of monthly savings.

In reality, you might actually do even better if you started out with a higher mortgage rate thanks to a low credit score and/or high LTV, and have since improved upon those things.

250,000 Homeowners Expected to Refinance from FHA to Conventional This Year

CoreLogic recently noted that thanks to the FHA policy change of requiring mortgage insurance for life, FHA to conventional refinances have soared.

Last year, such refis accounted for about 8% of all refinance transactions, with about 20,000 loans originated per month.

In 2010, that rate was about 4,000 FHA-to-conventional refis per month, or just one percent of refinance transactions.

Since 2013, when the FHA’s mortgage insurance policy changed, about 2.9 million borrowers have taken out FHA loans. CoreLogic expects another 250,000 of these borrowers to go conventional in 2017, thanks in part to another 5% rise in home prices.

If you’re currently in an FHA loan, it might be time to consider a conventional loan instead if you stand to save a decent chunk of money each month.

Just be sure to take note of how long your FHA mortgage insurance will actually be in-force. Some borrowers with older FHA loans, 15-year fixed mortgages, or those who originally made large down payments might have more favorable insurance requirements.

(photo: Phil Leitch)

source: thetruthaboutmortgage.com

What is Private Mortgage Insurance?

Depending on the type of mortgage and the type of borrower, the initial down payment on a home might not be a significant percentage (less than 20%) of the total price. In situations like this, the lender knows that the borrower doesn’t have much stake in the property, which means they are at a greater risk of defaulting on their loan.

The result is that the borrower has to pay for private mortgage insurance (PMI), which usually amounts to between 0.5 and 1 percent of the loan. So if you get a mortgage for $200,000, and your mortgage insurance premium is 1 percent, you’ll pay $2,000 a year for PMI, or about $167 a month.

Paying extra on your mortgage certainly isn’t enjoyable; however, it does allow borrowers who wouldn’t be able to afford a higher down payment the ability to purchase a home. When does it end? You might be wondering. There are two ways you can get rid of private mortgage insurance.

1. Borrower-requested cancellation

 

Once you’ve attained 20 percent equity in your property, you can ask your lender to cancel PMI on your property; however, they have no obligation to do so. There are many ways to build equity faster, the simplest of which is to pay a little extra every time a mortgage payment is due.

Home improvements, if chosen wisely, are another way to get to that 80 percent loan-to-value level. The reason being that your loan will stay the same, but your home will now have a higher value. The difference between your loan and the new value is equity in your pocket. Just remember that before the lender will eliminate PMI, they’ll require a home appraisal, which costs about $300-$400.

2. Automatic termination

 

If you can’t afford extra payments, or your lender rejected your cancellation request, never fear, in a few years your private mortgage insurance will automatically terminate.

The Homeowner’s Protection Act (HOPA) makes it illegal for lenders to unnecessarily charge borrowers mortgage insurance. Typically, this means that when your mortgage balance is paid down to 78 percent of the original value, lenders will automatically end private mortgage insurance.


If PMI sounds like a headache, then start saving and make sure your down payment is greater than 20 percent. You might have to wait longer until you make a purchase, but the stress you save yourself could make it worth it.

source: totalmortgage.com

4 Reasons Reverse Mortgages Aren’t Mainstream Products—Yet

Despite ongoing changes that aim to make the reverse mortgage a safer product for consumers and the Federal Housing Administration-insured program as a whole, the product still has some barriers to overcome in order to transition into a mainstream retirement planning tool.

Some of these barriers include the reverse mortgage’s upfront costs, misuse, the stigma associated with tapping home equity, and misconceptions of the product, according to John Salter, an associate professor of financial planning at Texas Tech University, who spoke during a recent webinar hosted by Reverse Mortgage Funding (RMF) and the Financial Experts Network.


Still, using a reverse mortgage will become more important in securing Americans’ retirement in the years to come, Salter and others in the financial planning community agree.

“Anybody doing work in the retirement world knows that home equity is going to have to be an important part [of the retirement equation] moving forward, because the baby boomer generation, especially, has big values and big equity tied up in their homes,” said Salter, who has spent years studying reverse mortgages.



Given the need to tap this equity, it’s important to acknowledge some of the barriers keeping reverse mortgages from becoming a bigger piece of the retirement puzzle. Salter and his peers shared four reasons the product hasn’t yet become a mainstay in portfolio strategies.

1. Costs

While a reverse mortgage doesn’t require a monthly mortgage payment, there are still costs associated with the loan.

“One of the issues that seemed to not make it a mainstream product was the upfront costs,” Salter said. “Prior to 2010, the [FHA] insurance fee was 2.5% of the home value. Plus the closing costs, insurance, appraisal fees, attorney fees, etc.”

That led many people, Salter included, to misunderstand the scope of the product, partly because it was so expensive relative to the average household income and home equity.

“It was hard to get around the cost issue and say, ‘Hey, this makes sense,’” he said.

However, today, the home equity conversion mortgage (HECM) has an upfront mortgage insurance premium (MIP) of 0.5% with the caveat that borrowers are limited to 60% of their principal limit during the first year.

“If you breach that, then you owe the original 2.5%,” Salter said.

Despite the costs, reverse mortgages can offer a number of benefits to retirees.

“It’s not totally free — which it shouldn’t be,” Salter said. “[But getting] over that and saying, ‘There are some benefits,’ [is key]. … I always say you get what you pay for.”

2. Misuse 

Over the years, the reputation of the reverse mortgages has been negatively impacted by borrowers who have misused the product.

One such example of this misuse is the ongoing non-borrowing spouse issue, Salter said. A common situation is as follows:

“There’s a 62-year-old husband and 60-year-old wife, he did the reverse mortgage, left the wife off, passes away after using all the proceeds and now the widow is left with repaying $200,000,” Salter said. “Stories say, ‘She’s losing her house because of a reverse mortgage.’ No, she’s losing the house because her husband did this without her and she’s selling the house to repay the loan.”



The Department of Housing and Urban Development (HUD) has been working to address such issues, but Salter said the issue at hand isn’t the product itself, but the way in which it’s used.

“I had a student who needed a credit hour to graduate and I said, ‘Get on the Internet and scour all the popular press. Find all the articles you can on reverse mortgages and find me one that says the product was wrong,’” he said. “She came back and said, ‘I couldn’t find one.’ She had lots of stories about the misuse [of reverse mortgages], … but nothing that would make me say there’s anything wrong with it. I think it’s just how it’s being used.”

3. Stigma 

For some time, owning a home has been the “American Dream.” To take away from that is a societal no-no, some say.

“In our society and culture, using home equity as part of retirement has been taboo — you don’t spend that,” said Dennis Channer, principal at Cornerstone Investment Advisors, LLC, during the webinar. “This concept of a course of last resort has permeated people, including myself, up until recently.”

There is a stigma associated with using home equity to fund retirement expenses, especially when someone’s home is paid off, Salter said, noting that some people feel like they’re getting back into debt by tapping their home equity.

4. Misconceptions

Finally, misconceptions of the product have kept reverse mortgages from becoming a mainstream retirement planning tool, at least for now.

“I’ll lose my home” and “the bank owns the home” are some of the common misconceptions tied to the loan.

However, with more financial planners educated on the loan’s benefits and how it works, consumers will start to have a better understanding of how a reverse mortgage might fit into their retirement plan.

In fact, the recent webinar was aimed at teaching financial advisors how a HECM loan could be used as a portfolio protection strategy.

The session — which offered the opportunity to earn 1.5 continuing education credits for Certified Financial Planners — joins other such initiatives meant to educate the financial planning world on reverse mortgages.

source: reversemortgagedaily.com

New FHA Home Loan Guidelines for 2015

If you need a low-down payment mortgage and you don’t have the best credit score, an FHA home loan can help you get the keys to homeownership. The FHA home loan program has been around since 1934 making homeownership affordable for many.

With the new year underway, the Federal Housing Administration recently announced changes to its program for 2015—changes that benefit many would-be buyers and anyone refinancing to an FHA home loan.

1. Reduced Mortgage Insurance Premiums

FHA home loans only require a 3.5% down payment, which has been a godsend for borrowers who can’t save the traditional 20%. Unfortunately, anyone who puts down less than 20% is required to pay an annual mortgage insurance premium (MIP), which is paid over 12 installment payments and included in the mortgage payment. Borrowers who pay MIP have higher monthly payments than those who don’t, but there’s good news for anyone who closes on an FHA home loan after January 26, 2015.

On January 9, 2015, the Federal Housing Administration announced an upcoming reduction in annual mortgage insurance premiums. For borrowers, this means more money in their pocket every month. This change applies to mortgages greater than 15 years. The reduction of 5% will reduce current mortgage insurance premiums from 1.35% to 0.85% for borrowers to put down less than 5%, and from 1.30%  to 0.80% for borrowers who put down more than 5%.

2. Elimination of Post-Payment Interest Charges

Some conventional mortgage loans charge a prepayment penalty, which is a fee borrowers pay their lender for paying off the mortgage in full within the first two to three years. FHA home loans have something similar, called a post-payment interest charge.

Basically, if you pay off your mortgage early either by selling or refinancing, your mortgage lender might charge interest for the entire month, regardless of when you actually paid off the mortgage. For example, if you paid off a mortgage on September 3, your lender would charge interest through September 30. New rules, however, get rid of this extra cost. Post-payment interest charges are eliminated beginning January 21, 2015. Lenders can only charge interest up until the date a borrower pays off his loan.

3. Advance Notice for Rate Adjustments

Adjustable-rate mortgages typically start with a rate lowered than fixed-rate mortgages. Unlike a fixed-rate, which has a set rate for the life of the loan, an adjustable-rate mortgage has a temporary fixed rate —  one to five years — and then the rate adjusts annually depending on the market. Previously, FHA home loan lenders gave borrowers a 25-day notice of rate increases. Effective January 10, 2015, lenders must give borrowers with an FHA-insured adjustable-rate mortgage a 60- to 120-day notice of any changes to the monthly payment. This provides borrowers additional time to prepare for higher mortgage payments.

Buying a house is arguably one of the most expensive transactions you’ll ever make in your life. And unfortunately, lack of funds is a home buying hurdle for many people. However, with an FHA home loans, affording a property has become much easier.

source: totalmortgage.com