To merge or not to merge
PRIVATE MORTGAGE INSURANCE: If your down payment is less than 20% of the purchase price of the home, mortgage lenders require that you take out Private Mortgage Insurance (PMI). This insurance protects the lender in the event you default on your mortgage. PMI has fallen out of favor in recent years due to the 80/10/10 (80% first mortgage, 10% second mortgage, 10% down payment), 80/15/5 (80% first mortgage, 15% second mortgage, 5% down payment), and 80/20 (80% first mortgage, 20% second mortgage, 0% down payment).
On the heels of the mortgage credit crisis comes word that the two bigger players in the mortgage industry may merge. However, after further deliberation, they decided against a merger.
MGIC drops bid for rival Radian
The mortgage insurers agree to end the deal and focus on how to survive in the industry.
By Emily Fredrix The Associated PressMilwaukee - Mortgage insurer MGIC Investment Corp. abandoned its $5 billion bid to buy rival Radian Group Inc. on Wednesday, saying it was in each other’s best interest to concentrate on surviving in the faltering mortgage industry.
Radian had vowed to see the deal through when MGIC announced in August it wanted to back out. But chief executive S.A. Ibrahim said Wednesday that Radian didn’t want to fight and instead needed to weather what he called “an industrywide scramble to survive.”
Investors seemed hopeful for both companies after news of the agreement.
Though Radian’s shares tumbled as much as 9 percent after the market opened Wednesday, they closed up 16 cents at $18.27. MGIC shares fell 29 cents to end at $30.05.
MGIC, based in Milwaukee, had agreed in February to pay about $5 billion in stock for Radian, valuing its shares at $60.78. Shares of MGIC closed the day the deal was announced at $70.09.
As problems mounted in the mortgage market, both companies saw their shares tumble and the deal’s value sink.
MGIC said it did not believe it had to complete its purchase of Philadelphia-based Radian because their joint interest in subprime-mortgage investor C-Bass LLC could be worthless.
The decision to end the deal was mutual, both companies said.
Neither party paid the other to get out of the agreement, according to a news release. The original agreement said there would be no breakup fee if a decision was mutual.
Both companies’ shareholders had already approved the deal, which MGIC had said would close in early October.
But woes felt throughout the mortgage industry made the deal difficult to finish, said Michael Zimmerman, MGIC’s vice president of investor relations.
While this is akin to splitting up, it remains to be seen what this means to the borrower. There aren’t too many PMI companies left and when the two biggest PMI companies are more concerned about surviving, especially when in 2007 PMI is tax deductible, this can’t be a good sign.
FAQ: How do I get the best rate?
From time to time I’ll be addressing client questions that are frequently asked and some questions that are quite obscure. Some questions are mortgage related, some are real estate related, and some are Denver related. My answers won’t be the canned answers you see on most mortgage sites.
Q: “How do I get the best rate?”
A: Let’s assume the following:
- you’re asking about a mortgage on a single family house that’s considered your primary residence
- you’re asking about a first mortgage without a second mortgage
- you have either 20% equity (refinance) or you’re putting a 20% down payment (purchase)
- you have credit scores over 720
- you don’t have any late payments of any kind
- you have assets i.e. money in a checking account, savings account, 401k, mutual funds and/or stocks at established financial institution(s)
- you have statements from the aforementioned financial institution(s)
- you’ve been in the same line of work for quite some time for the same company
- you have a limited amount of debt
- your debt to income ratio is far below the 40% threshold
If you fit this profile you’ll get the best rates because mortgage institutions view this profile as little to no risk. These loans are typically run through an automated underwriting program i.e. computer software that runs an algorerithm (software geek joke) and gives you a loan approval in seconds. Even if you don’t fit this profile 100%, the automated underwriting program may still grant you an approval in seconds. Your history of paying debt (credit score), capacity to pay the loan (income/assets), and the collateral backing the debt (property) all plays a role in getting the best rate.
A new spin on Interest Only Rates
In the last year or two, the 30 Year Fixed Interest Only programs have risen in popularity. These are 30 year loans that have an introductory Interest Only payment for 10 or 15 years before the loan amortizes to a fixed payment schedule.
Confused? Don’t be.
Basically, it’s one loan split into two:
The first loan is an interest only loan for the first 10 or 15 years. So if you took out at $250,000 first mortgage with a rate of 6.5%, the first loan has an interest only payment of $1354.
The second loan is a fully amortized loan for the next 20 or 15 years. So if you only pay interest during the first 10 or 15 years, your principal balance will stay at $250,000. Your second loan will have payments of $1864 (20 year amortization) or $2178 (15 year amortization).
The Real Estate Journal (Wall Street Journal’s Real Estate section) has an article on this loan, called New Type of Mortgage Surges in Popularity.
Zero down home loan
Editors Note: Due to the mortgage and credit crunchy, zero down home loans are no longer available. If you’re in need Denver Home Mortgage, we can discuss your mortgage situation.]
Zero down mortgage financing is available to many people. It is very possible for a large number of consumers to qualify for a home purchase without putting any money down. This has become a very competitive market for lenders competing for this business and the number of homeowners who obtain loans with no money down is growing each year.
It is important to realize that while it may be the only way a borrower can purchase a home, a zero down mortgage does carry a higher interest rate. Ultimately the borrower’s goal should be to refinance when there is enough equity to achieve an 80% Loan to Value (LTV).
One option for high credit score borrowers who have minimal disposable cash is to use a 103% loan. This loan allows you to borrow up to 3% in addition to the purchase price to help with closing costs. Ask your preferred mortgage professional if you qualify for a 103 LTV program.
Some conforming zero down programs do require you to contribute at least $500 to the purchase. Your earnest money counts as money towards purchase. You may also be required to pay your hazard insurance out of closing so that will be another out of pocket cost. Ask your mortgage broker for details on the programs they offer.
The most common way mortgage brokers structure “Zero Down” financing is to break the loan amount into a first and a second mortgage, with the first mortgage consisting of 80% of the loan amount needed and the second mortgage being 20%.
Zero down mortgages are a great tool to use, even if you have saved up for a down payment. By choosing the zero down mortgage, your down payment money can now be used for closing costs associated with the loan, moving expenses, new furniture, or any other expenses that you may have when you move into your new home.
If you cannot afford a down payment for your home, there are many down payment assistance programs and grants that may be able to help you purchase your new home. Often these programs are limited to first time home buyers or those with low income. However, there are often no limitations. Call me at and I may be able to find a program that will work for you.
Obtaining a true zero down mortgage is when you will not have to come to closing with any funds of your own. In order to achieve this you will need to either have a no closing cost mortgage which can get expensive, or you can have the sellers pay closing costs. Traditional conforming lenders will generally let the sellers pay up to 3% of your closing costs, while most Alt A and subprime lenders will allow up to 6% in closing costs paid by the seller.
Often times zero down payment programs are available to first time homebuyers. If you need a stated income program you may be able to obtain a stated zero down program with an Alt A or subprime lender.
In 2005, 43% of first time home buyers used zero down programs. You may qualify for one of these programs. Call me now!
Why are second mortgage rates higher?
Mortgage rates are all based on risk. The lower of a risk the loan is the lower the rate will be. Second mortgages are riskier loans. In the unfortunate event of a foreclosure the second mortgage holder gets paid second, not first. If threes not enough money to payoff the second mortgage often they take a loss. Since they are higher risk loans to investors the carry higher rates of return (so investors will purchase them).
A mortgage is considered a lien on your property. A first mortgage is in the first lien position and is the least amount of risk because they are the first to get paid should the borrower default and the home be sold through sheriff’s auction or through some other type of sale. A second mortgage is in the second lien position and is at a considerably higher risk than the first so a 2nd mortgage usually has more strict lending guidelines and credit requirements and will also charge a higher interest rate to make up the difference of this greater risk. If you also had a third lien on your property, they would have the greatest risk and even much worse terms than the first and 2nd liens.
If a homeowner files for BK the second mortgage is not guaranteed to be paid off. So the lender who makes a loan in the form of a second mortgage vs. a first mortgage assumes a higher risk. The lender offsets that risk by charging a higher rate.
Most second mortgages are also held in the lenders own loan portfolio rather than being sold to Fannie Mae, etc. Given that, there is considerable variation in rates, terms, qualification criteria, etc. from lender to lender.
When you take out a 100% one loan you will pay for private mortgage insurance (PMI). When a loan is sold on the secondary market to Fannie Mae or Freddie Mac they will only insure 80% of the value of the home. This insurance covers the other 20% of your loan in the event that you don’t’ pay and the property goes to foreclosure. Second mortgages, when used on an 80/20 combo loan program are self insured and for this reason carry a higher rate. Meaning you don’t have to carry PMI.
Rates on second mortgages will always be higher because the risk to the lender is higher. The rates will vary as with a first mortgage, depending on your credit worthiness, ability to pay and combined loan to value ratio. Combined loan to value ratio is the combination of the first and second mortgage compared to the sale value of your home. The lower the ratio is, the better rate you will get.
Types of closing costs
Certain areas of the country may have added closing costs, but these are the general types of closing costs you might see at closing: Attorneys or escrow fees Property taxes Pre-Paid Interest Loan Origination fee Recording fees First premium of mortgage Insurance Title Insurance Loan discount points First payment to escrow account for future real estate taxes and insurance Paid receipt for homeowners insurance policy Underwriting fee Tax service fee Broker fee Appraisal Fee
Always take your Good Faith Estimate with you to compare to the fee’s on the final HUD statement. You want to make sure that there were no extra added fee’s.
Recording Fees are the costs to record any documents that needed to be recorded at the county clerk’s office. The most likely documents that are recorded are the mortgage agreement, the note, and the deed. Recording is often done by the title company.
The Settlement document containing the final closing costs or HUD may also be referred to as the HUD-1 or HUD-1A
Closing costs are fees associated with any real estate loan transaction. Federal law requires the lender to disclose all reasonable fees at the origination of the loan on a ‘good faith estimate’ within 3 days of application. All actual closing costs are then again disclosed on the closing documents , commonly called the HUD .
Property taxes may be credited to you if they are paid in the back or you may have to pay the property taxes if they are prepaid in that particular state.
Prepaid interest is the interest per day that the lender charges for using the money. For example if you close on the 10th of the month you will pay interest for approximately 20 days (in a 30 day month) for using their money for 20 days then on the first of the following month your interest will start to accrue daily for the full month. The purpose is so that when you make your first mortgage payment you are only paying the 30 days worth of interest and some to the principal compared to paying for 50 days worth of interest if you were not to pay the prepaid interest.
Should I refinance my second mortgage?
Many consumers are becoming worried about the rising interest rates on their second mortgages and want to know if they should refinance to consolidate their first and second mortgage into one. One factor a borrower can use to gauge if they should refinance or not is a blended rate calculation. The blended rate is the weighted average rate for your first and second mortgage at any given time. If you can lower your blended rate by refinancing your first and second mortgage into a single loan, you may want to refinance. The tricky part is if you decide to wait, how long you should wait. If you refinanced recently and have a low fixed rate first mortgage, you may have to choose between a higher fixed rate or keeping your second mortgage that continues to increase in rate.
As the balance on your first and second mortgage change, so will your blended rate. The best way to calculate your current blended rate is to use the following example: First mortgage balance multiplied by first mortgage rate plus the second mortgage balance multiplied by the second mortgage rate and divide that number by your total balance of both loans. There are calculators available on the Internet that can quickly calculate your blended rate if you plug in these basic numbers. Of you can contact me and I can help you calculate your blended rate and decide if refinancing is right for you.
Second mortgages are often tied to the prime rate. The prime rate has been adjusting upward the last several years. Consolidating your second mortgage with your first is often worthwhile even if rates have gone up and your first mortgage is at a very attractive rate compared to what is currently being offered.
If the balance on the second mortgage is relatively small and will be paid off soon, you may not want to refinance the two mortgages into one single loan. There will be costs associated with refinancing. If the second mortgage will be paid off within the next year, your exposure to the increasing rate environment is limited. In this case, the security offered by a fixed rate refinance may not justify the closing costs.
If your second mortgage is a home equity line, it is tied the prime rate which has been rising rather quickly. If you have a low rate first mortgage and do not want to refinance it to consolidate your two loans, consider replacing your equity line with a fixed-rate second. Rates are lower and are fixed for the life of the loan which can be up to thirty years. Ask your mortgage consultant about these.
All other things being equal, sometimes homeowners just want to have one mortgage payment to make every month.
Another factor to consider is that you loose the flexibility, and security that a Home Equity Line of Credit provides. Many borrowers keep an open line of credit even if it has no balance as a rainy day fund. In the event you need money quick or need a large amount of money a home equity line can provide that if there is available funds on the line. By refinancing you may lower your payments but you may also loose that security. Alternately if there is available equity in your home you may be able to refinance that secant mortgage and add another line of credit that has a zero balance. This allows you to lower your current payment while maintaining the security of available funds
How do you figure out what your blended interest rate is? For example, if you currently have an 80/20 loan, with interest rates of 6.625% and 9.875% respectively; You take the first rate of 6.625 times 80% and come up with 5.3%. You then take your second loan, I.E. 9.875% and multiply it by 20% and arrive at 1.975%. Add the two together and you have your blended rate, 7.275%. If you can refinance with a single loan for a lower interest rate, it may be a good idea.
An experienced mortgage planner will be able to help you evaluate refinancing a second mortgage. Important things he should ask you would include:1) when does your draw period end (for lines of credit)? At the end of the draw period, your loan will convert to a fixed rate second mortgage and you lose the flexibility of being able to draw against the equity for emergencies.2) how does the margin on the new loan compare to the margin on the old loan? If your home has benefited from significant appreciation, your total loan to value may be low enough to get a lower margin which will help offset the higher indexes of today’s market.3) How are you utilizing your second mortgage? Paying off your higher rate credit card balances to get out from under the interest or floating a small business are common considerations FOR a second mortgage, but should not become routine.
There are other factors to take into consideration to such as how long you intend to own the property. If you are going to sell soon then you might want to stick it out. The only way to truly know is to look at all factors and plug this information into a financial calculator or mortgage calculators. If you are inexperienced in finances then consult you mortgage broker and ask him to run some calculations for you.
A large part of the decision on if to refinance your second mortgage will be based on your first mortgage. If you have a low rate first mortgage you may not want to refinance them together. Instead you may choose to replace your current second mortgage with a home equity line.
Seller carry back
A home seller may be able to loan a portion of the selling price to the buyer and secure it with a mortgage or trust deed against the home. The seller would not get his portion of the sale immediately in cash but would get income in the form of the payments made by the buyer.
This is a popular form of financing, when borrowers cannot otherwise qualify for a traditional piggy back loan, or are unable to come up with an otherwise required down payment.
The lender will want to see the terms and agreement of the seller held second. The lender will figure in the payments of the seller held second when qualifying the borrower for the first mortgage.
Other sites: Mortgage Broker | Conforming Loans| Pay Option Arm Calculator
Second Mortgage
A mortgage that has rights subordinate to a first mortgage or in second position.
Many current homeowners use a 2nd mortgage to pay off credit card balances. Interest rates on second mortgages are often lower than that of high interest bearing credit card accounts. Interests paid on second mortgages may also be tax deductible for some homeowners. As always, check with a Certified Public Accountant before taking such deductions.
Unfortunately, some borrowers interpret a payment-reduction consolidation second mortgage as a license to take on more non-mortgage debt. A few years later, they look to consolidate again. If their house has appreciated enough, they may be able to, but sooner or later they run out of equity.
A Second Mortgage uses your home as collateral. Your home equity is the part of your home that you actually own and this is the guarantee for your loan.
Some second mortgage loans may extend for as long as 15 or 20 years; others may require repayment in one year. You will need to discuss the repayment terms with the individual mortgage company and select one that offers terms that best suit your needs. For example, if you need to borrow $20,000 to make repairs on your home, you may not want a loan that requires you to repay the entire amount in one or two years because the monthly payments may be too high
Sometimes referred to as a Junior Loan, Second mortgages in all their varieties can be powerful tools to consolidate debts, make home improvements, or avoid paying mortgage insurance. For more information, contact one of our mortgage professionals today.
Be sure to ask if a no closing cost second mortgage is available to you!
When a borrower cannot qualify for 100% financing with their current credit score, they may be able to qualify using an 80/20 combo. The borrower actually gets two loans, one for 80% of the sales price, and the second mortgage for 20%. This allows the borrower to get into the home at 100% financing with a lower credit score than what is required for 100% one loan.
A 2nd loan, on the same property, that is in a junior lien or subordinate position.
Sometimes a second mortgage is helpful in that it allows a borrower to maximize the cash out available without having to pay private mortgage insurance on one loan with a loan amount over 80% of the home’s value.
If you would like to discuss the advantages and disadvantages of any 80/20 versus a 100% loan, please feel free to contact me. I will be more than happy to run through both scenarios for you, to see which option will benefit you the most.
Usually the 20% loan will have a higher interest rate than the 80% loan. However with the first loan only being 80% loan to value it will generally carry a better interest rate than a 100% loan. If you qualify for a 100% loan and an 80/20 chances are that the 80/20 will have a lower combined monthly payment.
Speak to your mortgage professional to see how getting a second mortgage can save you money every month on your bills.
Second Mortgages are generally available in two varieties, a Fixed Rate Second or a Home Equity Line of Credit or HELOC. A fixed rate second mortgage generally have much higher rates and are for a shorter term 15 to 25 years. A HELOC is also a shorter term but has lower rates that are adjustable and usually tied to PRIME. A HELOC works similarly to other lines of credit or credit cards. You have a total available balance and make payments on the amount of balance you owe. The repayment of a HELOC is also split into two time periods, a draw time, and a repayment time. During the draw period you can use the available equity and pay it back at will and an interest only monthly payment is due on the balance. During the repayment period the remaining balance is fully amortized and a principal and interest payment is made.
To really understand the benefits of these scenarios you will want to contact a mortgage professional and let them evaluate your current situation. You will need to express to them what your goals are for the near and long term future. These are important factors in determining what loan program is right for you.
Remodeling your home
When remodeling your home it is recommended to get a licensed contractor, depending on the size of the job. There are many DIY (Do It Yourself) things that you can do around your house to improve and remodel your home but if you plan on adding an addition, rewiring the whole house or doing other large projects a licensed contractor is usually the way to go. Some tips to remember when remodeling: Always get an estimate before the contractor begins work. Never pay the contractor before the work is complete. Check references and ask to see pictures of work the contractor has done. Don’t over improve your house so much that it is by far the nicest, biggest and best house in your neighborhood. This can cause problems if you ever needed or wanted to sell the home and may make it hard to get back the money you put into it. Last get a timeline from the contractor of the work being done so that you can plan accordingly. Consult a mortgage professional to assist with the financing of your home improvement.
If you want to remodel to sell faster and are working on a limited budget when remodeling your home, the areas you will want to spend your money, time and effort will be the kitchen and the bathrooms. Although these 2 areas will make your home sell faster than any other there is one more area you will want to some effort into - Curb appeal! Some potential buyers will not even get out to look at the inside of a home if they don’t like the way the home looks when they drive up.
When remodeling your home you cannot not expect to get out what you put in. In most instances If you spend $30K remodeling you will not increase the value of your home by $30k.
A second mortgage or a home equity line of credit are two great ways to get the cash you need to remodel your home. Generally you will get a much lower rate than you would with a credit card and the interest on the 2nd mortgage and home equity line of credit will be tax deductible. You also have the option of refinancing your first mortgage to take extra cash out to pay to remodel your home. Talk to a licenses mortgage agent today to find out which option will be best for you.
If you don’t have the cash to pay for these improvements, you may qualify for a renovation loan. The lender will loan an amount based on what your home will be worth after your improvements are made.
Remodeling your home is a great way to increase the marketability of your home as well as the value.
Other sites: Mortgage Broker | VA | Why should I refinance | MIP | Increasing your homes value | Investor Loans| Pay Option Arm Calculator