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!

Refinance Tool Box

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!

Refinance Tool Box

Homeowner Rescue Plan - The Bad and the Good

Despite reservations, Bush is ready to sign the mortgage relief measure for 400,000 strapped homeowners. The measure, regarded as the most significant housing legislation in decades, lets homeowners who cannot afford their payments refinance into more affordable government-backed loans rather than losing their homes. It also offers a temporary financial lifeline to troubled mortgage companies Fannie Mae and Freddie Mac -- pillars of the home loan market whose losses have sparked investor fears -- and tightens controls over the two government-sponsored businesses.

The bad. As with the government's previous attempt to protect and bail-out homeowners in line for foreclosure, the current measure is much the same. The FHA will be allowed to insure up to $300 billion in new 30-year fixed-rate mortgages for at-risk borrowers in owner-occupied homes if their lenders agree to write down loan balances to 90% of the homes' current appraised value. Will it help many people to stay out of foreclosure? Not really. You see, its the same story all over again. Individual homeowners set to lose their homes must make an "arrangement" with their lender to reduce monthly mortgage payments into the affordable range. The homeowner must meet pre-defined criteria to qualify and it is ultimately up to the lender to allow a renegotiation or not. Most homeowners will not be helped with this measure, which in my opinion, is no more than a public relations "add-on" to the bill to help pacify disapproval of the Fannie and Freddie bail-out.

The good. To free up safer and more affordable mortgage credit, the bill permanently would increase to $625,000 the size of home loans that Fannie Mae and Freddie Mac can buy and the FHA can insure. They also could buy and back mortgages 15 percent higher than the median home price in certain areas. Also, the bill allows Treasury over the next 18 months to offer Fannie and Freddie an unlimited line of credit and the authority to buy stock in the companies if necessary.

Restored investor faith in the quality Fannie/Freddie mortgage backed securities, the expansion of low cost available credit for home lending, and the increase in loan limits qualifying for conventional home loan mortgage rates is the real intent and the real positive of the measure.

In recent months, we have witnessed lackluster investor participation in the mortgage markets. This has kept current mortgage rates, although good, from reaching the lowest levels in history. Lender spreads continue at all-time highs to account for the current risk in the market.

The effect of more available and safer mortgage credit will lead to more action on the home-buying front. In turn, housing stabilizes and lenders reduce their mortgage spread premium as risk lowers and lender competition increases. This is the good that can come with this measure.

I know, there are many out there stomping at the bit because taxpayers may have to foot a large bill for the bailout. I don't blame them, and agree that lender greed coupled with borrowers with blinders on, are at the root of our current housing mess.

No matter how we got here, or who is to blame, something needed to be done. The financial stability of our nation is at stake, and I think this is a major step in the right direction.

Foreclosure rates continue to rise and home sales tumble.

220,000 homes were lost to bank repossessions in the second quarter, according to a housing market report Friday issued by RealtyTrac. A total of 739,714 foreclosure filings were recorded during that three-month period, up 14% from the first quarter, and 121% from the same period in 2007. That means that one of every 171 U.S. households received a filing, which include notices of default, auction sale notices and bank repossessions.

Existing home sales fell 2.6 percent in June, more than double the expected amount. The National Association of Realtors reported Thursday that sales dropped by 2.6 percent last month to a seasonally adjusted annual rate of 4.86 million units, the slowest sales pace since the first quarter of 1998.

Yes, we certainly could use a lift, and the housing bill could be just what we need.

May the Mortgage Rates be with You!

Refinance Tool Box

Rates A-Risin

Rates have bulked up considerably this week. .25% to .50% depending upon the term and LTV.

There are a number of factors causing this, but the main culprits are the treasury yields and mortgage spread premium. The 10-year trasury yield has gone up almost one quarter percent in one week. Money has been moving out of bonds and into the stock market on the risk side and other higher yielding investments on the safe side. Lately, the drop in oil has spurred the activity out of bonds.

You might ask yourself... Self, why have 30-year fixed rates gone up one-half percent when the treasury yield only went up one quarter percent?

Well, the mortgage spread premium that mortgage buying investors and banks has gone up once again. Perceived mortgage investor risk has heightened with the Fannie and Freddie bail-out news. There are more and more lenders pulling out of the mortgage market. Less competition equals higher mortgage rates when demand is less than stellar.

You might consider locking a rate if you are refinancing and have a beneficial program option. Mortgage rates are still in a low range historically, but that could change and quickly. Better to lock a sure thing low rate than to sit on the fence and let your benefits rise away into the sunset.

I've experienced too many people talk themselves out of locking superior rates this year, waiting for lower and lower rates. So many have been burned by the hesitation this year. Hey, rates could go down from here, but the odds of a substantial rate reduction in the cuurent financial environment is very slim. The odds of mortgage rates rising even into the 8% range is not out of the question. Important thing to keep in mind if you are currently shopping mortgage rates.

May the Mortgage Rates be with You!

Refinance Tool Box

Welcome to Mortgage Gamblers Anonymous!

Welcome to the first meeting of Mortgage Gamblers Anonymous. Our support group is here to help those that sit on the fence checking mortgage rates day after day, yet cannot bring themselves to actually lock a rate. They possess a grave fear that the minute their rate is locked, mortgage rates will suddenly drop. To their chagrin, stomachs turn as mortgage rates go up, when great rates were available only yesterday. Yes, this is a horrifying disorder that unfortunately affects millions in our country. It needs to stop!

Working together, we can make a difference. Those sitting frozen in fear, glancing at their latest mortgage rate quote, can and will say “Lock My Rate!” They will not feel remorse if rates drop after commitment. In fact, our ex-mortgage gamblers will rejoice in the knowledge they made a wise financial decision that will produce benefits for years to come.

First up…. My name is Power Arms and I am a Mortgage Gambler. Alleluia! The crowded room cheers in excitement at the revelation, tears flow, and one by one all members admit they are in fact ….. Mortgage Gamblers!

You too, can make this courageous affirmation and end your suffering! Don’t worry, all Mortgage Gamblers Anonymous member identities are held completely confidential by punishment of a rather large mortgage pre-payment penalty for those who leak names.

Ok, I might have gone slightly overboard with our new club, but my fellow mortgage professionals and I work with this situation on a daily basis. Literally thousands upon thousands of rate shoppers looking for the best mortgage rates, are eligible for a rate that will bring substantial immediate and long-term benefit, yet state …. “I’m gonna wait for rates to drop a bit more”. Rates promptly rise and reduce their original benefit opportunity. The common follow-up response …. “I wish I locked the rate with the first quote you gave me …. I think I’ll wait for rates to drop to get that first deal”.

Don’t feel bad if you fall into this category, you have plenty of company. My unofficial guess is that more refinance mortgage shoppers wait for a better deal, rather than lock immediately, even when the benefits are quite substantial.

Refinance rates are still near historical lows, so rate shoppers should keep in mind that currently, there is not a lot of room for rates to drop. Yes, maybe there is room for a one-half to three-quarters percentage rate drop under perfect conditions, but recent underlying economic factors suggest otherwise.

Look at it another way. A half-point reduction in rate on a $200,000 mortgage will result in savings of roughly $60 per month. Now, assume that refinancing at the current rate will save you $300 per month. You decide to wait because you want that extra half-point cut in rate, although the odds are not in your favor. If you have to wait one year to get your dream rate, you lose $3,600 (12 months x $300 initial savings benefit). You wait three years, lose $10,800. Wait five years, you lose $18,000!

Now, assume that you timed things perfectly and got that one-half point cut in rate the following week (repeat- highly unlikely), which results in a monthly savings of $360. Over five years you would save $21,600 as opposed to the $18,000 savings by locking your original rate quote. The difference in savings is only $3,600 over five years.

Would you risk losing a “sure thing” $18,000 five-year savings over a high-risk wait for a rate drop that will only save an additional $3,600? I hope not!

Every once in a while, we have to bring out the “Tough Love” here at the Refinance Tool Box. Mortgage Gambling is a tough addiction to break, but we know you will overcome! We hope that you will be able to “Lock that Rate” when presented with a beneficial refinance scenario, and not be that guy who risks and loses multiple thousands, gambling to save a few extra bucks.

May the Mortgage Rates be with You!

Refinance Tool Box

Fannie and Freddie – Proud Parents of Many New Mortgages to Come!

Government backing of GSE giants Fannie Mae and Freddie Mac has bolstered the mortgage industry outlook for now and ensured us that Fannie and Freddie will continue to adopt new mortgage offspring, adding to their already huge family of home loans.

The Bush administration and the Federal Reserve announced an emergency rescue plan Sunday to bolster Fannie Mae and Freddie Mac, which hold or guarantee more than $5 trillion in mortgages -- almost half of the nation's total.

The plan would temporarily increase a long-standing Treasury line of credit that could be provided to either company. Treasury also said it would, if necessary, buy stock in the companies to make sure they have enough money to operate. The Fed also announced it would allow Fannie and Freddie to get loans directly from the Fed -- a privilege previously granted only to commercial banks until this March, when the Fed extended the borrowing to investment banks to deal with the collapse of Bear Stearns.

Fannie and Freddie buy mortgages and then package them into bonds, which they guarantee. They then sell the bonds to investors, including mutual funds, hedge funds, pensions, annuities - just about any institutional investor you can think of. Monday began with a good sign for Freddie Mac: It attracted more bidders than it had all year for one of its regular debt auctions which raised $3 billion in short-term securities.

The government has caught flak from many sides for it’s response to the Fannie and Freddie credit crisis. The biggest outcry is that the Fannie-Freddie lifeline puts taxpayers on the hook for the bill. The sad truth is that without government assistance, taxpayers would ultimately pay a much higher price with a Fannie-Freddie collapse.

A collapse of Freddie and Fannie would mean disaster for this economy, already walking on a tight-rope. Warren Buffett has made statements in the past that he feared the failure of Fannie and Freddie could set off a "derivatives time bomb" that would implode the whole financial system.

According to Bloomberg, "Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules... The fair value of Fannie Mae's assets fell 66 percent to $12.2 billion, data provided by the Washington-based company show, and may be negative next quarter." Both companies need to raise billions of dollars to stay afloat and that is the issue. With shares of both companies in collapse and little investor faith in their new bond issues, it would have been impossible for them to raise the money they need. The government backing has at least in the short term, relieved this capital infusion issue.

What will the cost to the taxpayer be? No one can tell at present, but it might not be as much as some feel. A new investor faith in the security of Fannie-Freddie bonds, coupled with a rebound in their share prices could significantly reduce the need for Fannie-Freddie to dive into its government credit line. The severity of the continued housing slump and inflation will ultimately determine the depth of taxpayer burden in this matter in my opinion.

How will this affect mortgage rates? Again, there are two opposing views. One camp feels that mortgage rates will rise significantly as inflation rises and mortgage investors demand a higher spread premium for risk.

Others, including myself, feel that we will continue on for the remaining year in a relative tight range for mortgage rates, not moving too far from current historical low levels. Investor confidence in Freddie-Fannie may even reduce the mortgage spread premium as evidenced this week.

Refinancing at current mortgage rate levels is advisable if you’ve been waiting on the fence. The best-case scenario, rates drop slightly from here. Worst-case, we get hit with heavy inflation and worse housing numbers and rates go up 1 percent to 2 percent. Don’t be that borrower sitting on the fence and missing the opportunity for great mortgage rates!

May the Mortgage Rates be with You!

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