Refinancing and Private Mortgage Insurance (PMI)

Private Mortgage Insurance ( PMI ) is required by conventional and FHA refinance lenders for individuals that borrow more than 80 percent of their home's value. This insurance is a protection for the mortgage lender from default on the loan. PMI is not a protection for the borrower.

Mortgage Insurance is typically paid monthly by the borrower, and included with the mortgage payment. Including PMI, your total monthly mortgage payment is made up of Principle, Interest, Mortgage Insurance, Taxes, and Homeowner's Insurance. Private mortgage insurance is a tax-deductible expense, beginning in 2007.

Mortgage Insurance (PMI) Cost?

PMI charges are dependent upon the Loan-to-Value ratio and the amount to be refinanced. The more that is refinanced above 80% of the home's value in five-percent intervals (ie: 80%, 85%, 90%, 95%, 100%), the higher the percentile used for the monthly PMI payment calculation. For instance, an 80% Loan-To-Value can bring a .50 percent multiplied by the loan amount for Mortgage Insurance, where a 95% Loan-To-Value ratio may bring a .75 percent of the refinanced loan amount for the PMI calculation. Figure on a .70 percent as an average PMI percentile for estimation purposes.

PMI Example:

Assume refinancing your home valued at $200,000 with a loan amount of $170,000. Multiply the $170,000 loan amount by .007, resulting in an annual PMI of $1,190. Next, divide the $1,190 by 12 for your monthly Mortgage Insurance payment of $99.17.

Terminating PMI

The Homeowner's Protection Act (HPA) of 1998 provides protection for home loan consumers regarding private mortgage insurance.

Under HPA, you have the right to request cancellation of PMI when you pay down your mortgage to the point that it equals 80% of the original purchase price or appraised value of your home at the time the loan was obtained, whichever is less. Lenders should automatically terminate PMI payments once the loan balance falls below 78%

It is always a good idea to keep track of your principle balance and notify your lender once you approach that 80 percent Loan-To-Value ratio to make sure your mortgage insurance payment is cancelled at the appropriate time.

May the Mortgage Rates be with You!

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Bad Credit Refinance

Exactly what is a “Bad Credit Refinance”?

Now this is not an official definition, but I’ll give it a go. A bad credit refinance is one in which an individual’s credit score and/or derogatory items listed on their credit report result in non-qualification for a prime conventional mortgage. In other words, you have to apply for a subprime refinance or an FHA home loan. The worst-case scenario is when the individual does not qualify for any refinance program available.

In recent years, most with bad credit would eventually refinance with a subprime lender and end up paying up to 3% and more in interest rate as opposed to the same loan scenario qualified with excellent credit. Yes there was a huge difference in refinance rates between bad credit subprime and excellent credit conventional home loans.

Those keeping up with the mortgage market, now understand that subprime lenders are pretty much a thing of the past and FHA has stepped in to fill the void. The important difference is that FHA home loans offer a distinct advantage over subprime mortgages in that they offer excellent refinance rates (comparable to excellent credit conventional interest rates) coupled with a high Loan-to-Value limit of 97% of the borrowers appraised home value.

So tell me, what is a bad credit refinance?

Again, this is not an official definition, but generally those individuals that have credit scores below a 620 FICO fall into the “bad credit” refinance scenario. In fact, those with credit scores between 620-700 and/or those financing most of the equity in their home would be advised to get an FHA home loan quote in addition to a conventional mortgage program quote to choose the best option for them.

FHA home loans are not credit score driven, but most underwriting investors will require a minimum of a 580 credit score to qualify. Also, no mortgage late payments in the previous 12 months will be allowed.

Those with credit scores below 580 will have a much more difficult time qualifying for a competitive refinance home loan. Today, it is mostly “hard money” lenders that cater to this crowd, and charge a major premium in interest rate for the privilege. An alternative to going “hard money” is to contact a reputable credit restoration company to improve your credit score within FHA range. The few hundred dollars spent on credit restoration with result in multiple thousands in principle and interest savings with a FHA refinance as opposed to a “hard money” home loan.

May the Mortgage Rates be with You!

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Refinace Rates Week in Review

For all the market volatility this past week, refinance rates were little changed on the whole. This makes sense as the 10-Year Treasury Yield ended the week at a break-even.

As we know, inflation and housing prices play a huge role, not only for refinance rates, but for the economy in general. We experienced a few bright spots in these areas this week. The dollar gained, oil prices dropped, and June pending home sales went up unexpectedly.


The assumption that the Fed is more inclined to raise interest rates helped drive some dollar buying ahead of Tuesday's FOMC meeting. As it so happened, the FOMC elected to leave the fed funds rate unchanged at 2.00%. A continued stronger dollar will help with inflation in a large way.

Crude oil prices dropped 7.9% for the week at Friday's settlement to $115.20 per barrel. They are now down 22% from the high they hit July. No need to mention the importance of oil prices to inflation.

The National Association of Realtors said its Pending Home Sales Index, which is based on contracts signed in June, was up 5.3 percent to 89.0 from a downwardly revised 84.5 in May. The pickup in June signings sharply contrasted with forecasts by economists polled by Reuters who had expected home sales contract signings to decline 1 percent. The realtors said the improvement in contract signings "appears to be broadening" and expressed hope that housing legislation signed into law last month will further encourage buyers.

One month's worth of pending home sales is not enough to provide a trend, but the numbers are a welcome change. A stabilization or reversal in housing numbers will have the biggest immediate positive impact on the economy and mortgage refinance rates. We'll have to keep an eye on next month's numbers and hope for the best.

Will this week's positive signs for inflation and housing signal a potential comeback for the economy and real estate? I doubt it, but always remember that perception breeds reality. The more positive signals reported, the better for the economy. Everyone likes to get in on the bottom floor and nothing better than a trickling of key positive econmic reports to get the pot stirring. When investors and home buyers feel like the train may have left the station, the action begins.


May the Mortgage Rates be with You!

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Risk and Refinance Rates

Today, Freddie Mac reported a $821 million loss in 2nd-quarter as more people with risky loans default. It was more than three-times larger than Wall Street expected as a huge number of borrowers with good credit fell behind on their exotic and risky mortgages. These so-called Alt-A loans make up about 10 percent of Freddie's portfolio, but accounted for more than half of the company's credit losses in the quarter.

About the only good news to take from today's Freddie Mac earnings report is the fact that most of the loss is derived from a relative few high risk areas - California, Nevada, Florida, and Arizona.

What does this mean for refinance rates?

Higher than expected losses from either Freddie or Fannie translates to a higher risk to investors in the mortgage backed securities market. This means that they expect a higher rate of return for buying mortgages.

We continue to experience this in the mortgage market on a daily basis. Depending on the refinance program, the mortgage spread is as high as 2.5%, which is a full point above it's average historical level of 1.5%.

This results in refinance rates that are up to 1 percent higher than normal. Thankfully, the 10 Year Treasury Yield remains at a low level, which offsets the higher mortgage spread premium.

Look at it another way. All things being equal, a par 30 year fixed refinance rate would be in the 5.375% to 5.5% range today using the historical spread premium!

The real deal for refinance rates and the economy as a whole comes down to the housing market. Rising risk and rising mortgage premiums will not decline until home prices stabilize. Most feel that we still have a way to go before this will occur.

If you are sitting on the fence want to refinance soon, now would be a good time to lock a refinance rate. It doesn't appear as if rates will drop much from here in the near future, but the risk of further refinance rate increases looms larger by the day.

May the Mortgage Rates be with You!

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Volatile Week in the Mortgage Markets

Strap yourself in. The wild roller coaster ride continues for the financial and mortgage markets.

The week ended close to where it started for the major market indices, but the 10 Year Treasury yield had a nice little decline and clipped an eighth point off mortgage rates overall.

Financials continue to take a hit, increasing the mortgage-spread premium across the board. Risk is the key here, and the economy is still not showing any clear signs of a recovery trend. This week, the FDIC seized two regional banks and Merrill Lynch announced on Tuesday that it is selling $30.6 billion worth of U.S. ABS CDOs for only $0.22 on the dollar, in an effort to reduce its risk exposure and shore up its balance sheet.

Of course, this week, President Bush signed the housing bill into law, which includes support for Fannie Mae and Freddie Mac. The new law will be a benefit to mortgage lenders as it restores investor faith in Fannie and Freddie issued mortgage securities. We’ll have to wait and see what it’s impact will be on the mortgage spread. Without any other economic stimuli, this backing of the twin tower mortgage giants should reduce the spread and lower mortgage rates.

The remaining portion of the housing bill is mainly political fluff designed to make the Fannie and Freddie bailout more palatable for the masses. Although I would like to mention one important add-on to the bill that actually has some teeth and positive news for Jumbo mortgage shoppers.

There are maximum amounts for loans that the FHA will insure, and that Fannie and Freddie will guarantee. Those loan limits were raised temporarily this year. The new law now raises limits permanently. For FHA-insured mortgages, the new limit will be 115 percent of the median home price in that area, up to $625,000.

For conforming mortgages, those eligible to be bought by Fannie Mae and Freddie Mac, the conforming limit will remain at $417,000 for a single family home. Starting next year, the new limit is either $417,000 or 115 percent of the area’s median home price, whichever is higher. This new provision should help Jumbo mortgage shoppers to shave a significant amount from their interest rate when refinancing or purchasing a new home.

Expect continued volatility for mortgage rates. For every positive sign, we get a negative report in return. Inflation, oil prices, financial liquidity, and housing numbers are the big areas to keep an eye on relating to their impact on mortgage rates. Mortgage rates, although off their yearly lows, continue in good shape.

May the Mortgage Rates be with You!

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