Mortgage insurance

[DVINNY]

IlPadrino,

I was calling the bank dumbasses. They are the ones going broke looking for welfare.

I do have to fault the banks, because 31% to me seems way too high, and if that's what they say is OK, many will take that loan.

I don't know of you're situation. Sorry if my post reads wrong. Which I think it does, my comments were geared at the bank.

 

[IlPadrino]

Sorry if my post reads wrong. Which I think it does, my comments were geared at the bank.

And I apologize for jumping to conclusions... I'm a little sensitive these days because though we continue to do the right thing (we're leasing the house at a monthly loss of about $1000), I think others are going to be rewarded for being irresponsible borrowers.

I do fault the banks, but only because I think they caused a large part of the problem by resetting interest rates after the 3/1 or 5/1 period. And where they did that on 1.5% interest rates, they get ALL they deserve with a foreclosure. I borrowed at 5.5% and refinanced to 6.375%... I really need to get down to 5% to make this more comfortable.

 

[DVINNY]

I should just keep quiet too, since I'm not an expert on the situations out there by any means. I can only comment on what seems insane to my comfort level.

My little Sis lives in L.A. and she tells me that my house would be $1Mil+ out there, so obviously, I wouldn't be able to afford to live in the same type of house if I were out there.

I have no idea how I would handle the situation out there, so I can only speculate from my seat on the mountain.

 

[Chucktown PE]

I have a question about all of the affordability guidelines and I don't know if any of you have an opinion. Dave Ramsey says you should buy a house where the payment on a 15-yr fixed rate mortgage is no more than 1/4 of your take home pay. In my mind there are two big variables here:

1. Take home pay is highly variable for a lot of people. This affects the ratios on the income side. Most of us probably have our health insurance premiums, dental insurance, all payroll taxes, etc. deducted from our paychecks, thus our takehome pay is much smaller than someone who owns a small business and pays for health insurance after taxes.

2. If you don't escrow then your "house payment" is a lot lower. For some of the houses I'm looking at taxes and insurance run about $4500 per year. This affects the ratios on the debt side.

So I think I'm being conservative when I consider my income what I bring home after all payroll deductions and my house payment includes my taxes and insurance to escrow. When I do this my house payment will be roughly 1/3 of my take home pay. I also don't have any other debt. How does everyone else view this?

 

[udpolo15]

I have a question about all of the affordability guidelines and I don't know if any of you have an opinion. Dave Ramsey says you should buy a house where the payment on a 15-yr fixed rate mortgage is no more than 1/4 of your take home pay. In my mind there are two big variables here:
1. Take home pay is highly variable for a lot of people. This affects the ratios on the income side. Most of us probably have our health insurance premiums, dental insurance, all payroll taxes, etc. deducted from our paychecks, thus our takehome pay is much smaller than someone who owns a small business and pays for health insurance after taxes.

2. If you don't escrow then your "house payment" is a lot lower. For some of the houses I'm looking at taxes and insurance run about $4500 per year. This affects the ratios on the debt side.

So I think I'm being conservative when I consider my income what I bring home after all payroll deductions and my house payment includes my taxes and insurance to escrow. When I do this my house payment will be roughly 1/3 of my take home pay. I also don't have any other debt. How does everyone else view this?

I don't know specifically for Dave Ramsey, but a lot of those ratios are for house costs, typically mortgage, taxes, insurance. As for any of the ratios in general, I think they should be used at most as a reality check, but at the end of the day everyone's situation is different. Spending 40% of your take home pay on housing might be the right decision for you. Using the ratios might at least force you to think about why it is appropriate for you to take on more.

If I followed the 25% rule I wouldn't be able to afford much in Chicago, even if I didn't include the taxes. I am buying for the long-term (at most I want to move once more) so I willing to make sacrifices early on. Over the life of the loan, I expect my housing/income to be much less than 25%.

 

[Chucktown PE]

I don't know specifically for Dave Ramsey, but a lot of those ratios are for house costs, typically mortgage, taxes, insurance. As for any of the ratios in general, I think they should be used at most as a reality check, but at the end of the day everyone's situation is different. Spending 40% of your take home pay on housing might be the right decision for you. Using the ratios might at least force you to think about why it is appropriate for you to take on more.
If I followed the 25% rule I wouldn't be able to afford much in Chicago, even if I didn't include the taxes. I am buying for the long-term (at most I want to move once more) so I willing to make sacrifices early on. Over the life of the loan, I expect my housing/income to be much less than 25%.

That's the other thing. With raises and such, I think the Dave Ramsey formula forces you to go way low on the house, and you might end up living in two or three houses, but it may be more cost effective to go with the 30 year note, and never move. Affordability is a problem down here as well if I don't want to move in 3 more years if we have another baby, or spend 2 hours a day in the car commuting to work.

 

[udpolo15]

I just ran a quick spreadsheet. If you start at 40% housing/income and get a 3% raise per year, your 30 year average is 26%. At 4% raises, you are 24%.

This is where the value in home buying is. It is not in the increase in net worth (which might be a side benefit), but the opportunity to fix your housing costs. The longer you stay in one place, the more you see this benefit. I look at my parents and my in-laws and they both have lower mortage payments than I do because they have both been at the same place for 20+ years.

 

[benbo]

And I apologize for jumping to conclusions... I'm a little sensitive these days because though we continue to do the right thing (we're leasing the house at a monthly loss of about $1000), I think others are going to be rewarded for being irresponsible borrowers.
I do fault the banks, but only because I think they caused a large part of the problem by resetting interest rates after the 3/1 or 5/1 period. And where they did that on 1.5% interest rates, they get ALL they deserve with a foreclosure. I borrowed at 5.5% and refinanced to 6.375%... I really need to get down to 5% to make this more comfortable.

I salute your responsibility. In your case it really is screwed because I gather you would still be living in the house if you didn't have to transfer for work (military).

That monthly loss would be a lot easier to stomach if the housing values were going up.

 

[jeb6294]

^^ you rock :th_rockon:
Anytime my hubby gets a car, he specifically asks them to remove all stickers/plate frames that advertise the dealer. They aren't paying him to advertise for them.

Several years ago I bought a new '97 Mustang Cobra. After everything was signed and I went to take it home, a "Duval Ford" tag (one of those plastic things that looked horrible) had showed up on the back. It wasn't there when I test drove it so I know they had just put it on there when they were "cleaning it up" for me. I pointed it out to the salesman and told him that I would be happy to tell people about my experience bacause I had gotter a really goog deal, but that they were not putting that on my car. He told me that they couldn't take it off so I would just have to live with it...I walked over, peeled it off (it's just on there with a piece of double-sided tape), handed it to the sales guy and told him that he wouldn't be seeing me in the future.

 

[IlPadrino]

I salute your responsibility. In your case it really is screwed because I gather you would still be living in the house if you didn't have to transfer for work (military).
That monthly loss would be a lot easier to stomach if the housing values were going up.

Ain't that the truth! I didn't choose to move and we still hope to go back, so it's a little easier to swallow.

 

[What!!]

I am thinking about buying a house but am reluctant to put 20% down in this current economy. The PMI would be about $150 a month extra. I am thinking about waiting for an year and then pay the balance to get under 80% of Principal to get rid of PMI. Can i do this or do i have to refi later to get an appraisal to get rid of PMI?

 

[Flyer_PE]

^On my first house, the PMI went away automatically when I reached 20% equity of the purchase price. No refinance or appraisal required.

 

[roadwreck]

ran a quick google search here's what I found on canceling PMI

How Do You Cancel or Terminate PMI?
Cancellation

Under HPA, you have the right to request cancellation of PMI when you pay down your mortgage to the point that it equals 80 percent of the original purchase price or appraised value of your home at the time the loan was obtained, whichever is less. You also need a good payment history, meaning that you have not been 30 days late with your mortgage payment within a year of your request, or 60 days late within two years. Your lender may require evidence that the value of the property has not declined below its original value and that the property does not have a second mortgage, such as a home equity loan.

Automatic Termination

Under HPA, mortgage lenders or servicers must automatically cancel PMI coverage on most loans, once you pay down your mortgage to 78 percent of the value if you are current on your loan. If the loan is delinquent on the date of automatic termination, the lender must terminate the coverage as soon thereafter as the loan becomes current. Lenders must terminate the coverage within 30 days of cancellation or the automatic termination date, and are not permitted to require PMI premiums after this date. Any unearned premiums must be returned to you within 45 days of the cancellation or termination date.

For high risk loans, mortgage lenders or servicers are required to automatically cancel PMI coverage once the mortgage is paid down to 77 percent of the original value of the property, provided you are current on your loan.

Final Termination

Under HPA, if PMI has not been canceled or otherwise terminated, coverage must be removed when the loan reaches the midpoint of the amortization period. On a 30-year loan with 360 monthly payments, for example, the chronological midpoint would occur after 180 payments. This provision also requires that the borrower must be current on the payments required by the terms of the mortgage. Final termination must occur within 30 days of this date.

What Disclosures Does the HPA Require?

http://www.frbsf.org/publications/consumer/pmi.html

 

[MonteBiker]

Have you thought about going with an 80-10-10 or 80-15-5 loan if they still exist. This is where you would either put down 5 or 10%, take out your typical 80% fixed and would then take out a second loan, usually even through the same lender and with maybe a percentage point higher interest rate, to cover the remaining balance. This was considered to be one of the least risky non-typical loans. This bypasses the whole PMI thing by not having a loan for more than 80% of the homes current value. The interest paid on the second loan is still tax deductible and you are putting equity in your new home as opposed to paying for insurance in case you ever default on your loan. The monthly payment on the second loan is usually about the same as the PMI payment and you get no benefit from the PMI. In my opinion, paying PMI is just throwing money away on a situation that you should not be letting yourself get into.

If you feel that you cannot afford to put down enough money and still have enough to live appropriately then maybe think about holding off another year or look at a smaller or less expensive house. Remember that it may be harder to sell a house in this market if you were ever in a jam. You do not want to default on your loan as that would cause you to have a harder time buying another house/car/etc in the future. Keep in mind that renting in this market is not terribly bad. In the case that you were to lose a job or need to transfer to another town, you have much less at stake and fewer limitations in finding something new.

 

[roadwreck]

Have you thought about going with an 80-10-10 or 80-15-5 loan if they still exist. This is where you would either put down 5 or 10%, take out your typical 80% fixed and would then take out a second loan, usually even through the same lender and with maybe a percentage point higher interest rate, to cover the remaining balance. This was considered to be one of the least risky non-typical loans. This bypasses the whole PMI thing by not having a loan for more than 80% of the homes current value. The interest paid on the second loan is still tax deductible and you are putting equity in your new home as opposed to paying for insurance in case you ever default on your loan. The monthly payment on the second loan is usually about the same as the PMI payment and you get no benefit from the PMI. In my opinion, paying PMI is just throwing money away on a situation that you should not be letting yourself get into.

I think they've changed the rules on PMI, it's now tax deductible. Previously the major advantage to doing an 80-20 or other similar loan was that the interest on the second mortgage was tax deductible and PMI wasn't. So it made sense to avoid PMI. That may not be the case now. I think that loans like an 80-10 or 80-20 may be much harder to get these days, it's loans like that which helped contribute to the mess the banking industry found itself in.

If you feel that you cannot afford to put down enough money and still have enough to live appropriately then maybe think about holding off another year or look at a smaller or less expensive house. Remember that it may be harder to sell a house in this market if you were ever in a jam. You do not want to default on your loan as that would cause you to have a harder time buying another house/car/etc in the future. Keep in mind that renting in this market is not terribly bad. In the case that you were to lose a job or need to transfer to another town, you have much less at stake and fewer limitations in finding something new.

I do agree with that statement. If you feel like you are cutting things to close and can't put the 20% down then you may be looking at buying to much house.

 

[Chucktown PE]

For the record, PMI is tax deductible. In addition, piggyback loans (80/10/10 and 80/15/5) are almost impossible to find now. Lastly, I am renting right now (my company bought my house in Atlanta as part of my relocation one year ago) because I think there is another 20 - 30% price correction left to come, at least in my area.

edit: RW beat me to it.

 

[MA_PE]

someone correct me if I 'm wrong but financing 90 to 100% of the purchase price is what caused the crash in the first place. If you start off with no equity value and the market goes down you are then upside down on the mortgage with no guarantee you will recovcer in the forseeable future. People in this situation tend to bail out of the loan and then the lender has to absorb the difference.... the walls come tumbling down.

Ergo, i believe lenders are likely not to approve such loan configurations.

 

[Capt Worley PE]

someone correct me if I 'm wrong but financing 90 to 100% of the purchase price is what caused the crash in the first place.

You're not wrong.

 

[MonteBiker]

someone correct me if I 'm wrong but financing 90 to 100% of the purchase price is what caused the crash in the first place. If you start off with no equity value and the market goes down you are then upside down on the mortgage with no guarantee you will recovcer in the forseeable future. People in this situation tend to bail out of the loan and then the lender has to absorb the difference.... the walls come tumbling down.
Ergo, i believe lenders are likely not to approve such loan configurations.

Added to that, they were using non-fixed arm loans for 90-105% of the house value based upon the fact that they could afford the current payment with the beginning interest rate. My suggestion, although it had not been explicitly said, was based upon an piggyback loan with a fixed rate. I apologize for not being explicit. Piggy-back loans are not necessarily any risky than a 95% fixed rate 30yr loan. The payment is what it is for the course of the loan term.

That is interesting that PMI is now tax deductible... I still wouldn't pay it as it doesn't do anything for the equity in your home. You are paying a fee for something you should already know that you will never going to have to use. Don't take the money from your emergency fund for the down payment. Wait until you have a down payment saved... Bottom line, if you cannot afford the costs of buying a home, now and in the future, then it is probably not in your best interests to buy until you feel that you can.

 

[udpolo15]

You're not wrong.

I would say this mess was not caused by people who took 90% to 100% LTV loans, but by people who took loans they could not afford. Once all the resets happened on the exotic mortgages, too many people flooded the market and prices start to fall, screwing the people with little equity.