Making a Larger Down Payment: Is It Worth It?

Making a Larger Down Payment-Is It Worth It- 150x150If you are getting ready to purchase a home, you are probably wondering how much of a down payment you should make and how it will affect your budget. Deciding how much to put down can be a tough decision, because the size of the down payment will have an influence over your mortgage. Making a larger down payment is usually beneficial, if you can afford it, but it also has a few downsides. However, making a down payment that is too small will attract extra costs, such as a higher interest rate or the requirement to pay Private Mortgage Insurance (PMI).

The Advantages of Making a Larger Down Payment

Generally, unless you can invest the money that you are going to use as a down payment somewhere else, making a larger down payment can actually save you money in the long run. Your monthly mortgage payments will be lower, the interest rate that you will be paying will be lower, you’ll avoid paying for Private Mortgage Insurance and have other advantages. Let’s take a look at the most important benefits that making a larger down payment will provide.

  • Lower mortgage payments. The down payment represents a big chunk of the total loan value, so the bigger it is, the smaller the remaining amount will be, meaning that your monthly mortgage payments will also decrease. By lowering the amount left to pay on your mortgage, you save money, because you won’t pay thousands in interest over the years. Lowering your monthly payments also makes your monthly budget higher, allowing you to spend more money on other expenses.
  • Lower interest rate. The higher your loan-to-value ratio is, the more of a risk you will be in the eyes of your lender. Making a larger down payment lowers your loan-to-value ratio and the interest rate that you will have to pay. A lower interest rate means that you will be paying significantly less on your mortgage over time, even if the difference is very small.
  • No Private Mortgage Insurance. Conventional mortgage loans require a 20 percent or more down payment in order to avoid paying for Private Mortgage Insurance. When making a larger down payment, you also save money by not paying a PMI.
  • Less risk of being upside down on your mortgage. If the housing market crashes and you are forced to sell your home, having a mortgage balance that is higher than your home’s value can put you in a very difficult situation. If you have made a larger down payment when you purchased the home, the risk of being put in this situation will be much lower.
  • Build more equity in your home. A larger down payment can help you build more equity in your home much quicker. If you encounter some financial hardships in the future, you can get past them much easier because you will be able to borrow more against the equity in your home.

Larger down payments are usually considered very beneficial, but they also have a few disadvantages. The largest one being that the money used for the down payment can be invested somewhere else, where they will generate a return, or left into a savings account where they will generate interest. Another disadvantage is that, because the interest rate will be lower on your mortgage, you will have less tax deductible payments. A third disadvantage, and a very important one, is that you lose access to an emergency fund if you tap into your savings in order to make a larger down payment.

Whether you decide to make a larger down payment, invest the money, or just keep it for a rainy day, depends entirely on your financial situation and future plans. You could be saving more if you put more money down, but you shouldn’t do it at the expense of financial security.

Do You Need PMI? Not If Your Home is Underwater!

Do You Need PMI-Not If Your Home is Underwater-150x150Sometimes the housing market changes radically and you end up paying mortgage on a home that has lost significant market value since it was purchased. This situation has become very common in the last few years, since the housing bubble burst and the US went into a recession. Many home owners have found themselves having to make the same large monthly payment on a home that is worth much less than before the recession. When this happens, homes become really hard to sell because their value is less than what the owners owe on their mortgages. Because of this, many homes were classified as distressed, creating large financial problems for home owners who wish to sell.

When a home buyer purchases a home and are able to put less than 20 percent down, they are typically required to purchase Private Mortgage Insurance (PMI). This is an attractive alternative for home buyers who don’t want to wait until they save more money to put as a down payment. Being underwater on your mortgage and having to pay Private Mortgage Insurance on top of the high monthly payments makes it very difficult for home owners to keep their home. Abandoning the home and buying another one, which will have a lower monthly payment, seems like a better alternative.

The Homeowners Protection Act of 1998 states that Private Mortgage Insurance can be canceled when you reach 20 percent equity in your home. When the equity in your home reaches 22 percent, PMI should be dropped automatically, but many times lenders don’t remove the policy until they are reminded. Unfortunately, many home owners don’t know this. If you are underwater on your mortgage, you can have your PMI canceled.

Qualifying to Have Your PMI Canceled

Even if your home is worth less than when you purchased it and you owe more on your mortgage than the home is currently worth, you can still have the Private Mortgage Insurance canceled. There are, however, a few qualification guidelines that you should be aware of:

  • The equity in your home has to be 20 percent or larger.
  • Your monthly mortgage payments must be up to date, with no missed payments.
  • Sometimes it is required that you don’t have any late mortgage payments for the last 6 months.
  • You must have been the owner of the home for at least 2 years.
  • There must not be any second liens on your property, such as a home equity loan or a second mortgage.
  • The property must not be a vacation home.

Even if the law states that the Private Mortgage Insurance must be canceled once the equity in your home reaches 22 percent, be prepared to have a difficult time getting your lender to actually do it. You have to send them several documents related to your mortgage and a letter requesting the cancellation. Your lender has all of this information already, so this is done mostly to prove to them that you are an informed customer.

Being underwater on your mortgage is hard enough without having to pay Private Mortgage Insurance, as well. Having to make the same payments on a home that is now worth significantly less than it did at the time of purchase might not make a lot of sense, unless it’s your dream home and you have become emotionally attached to it. Fortunately, by canceling your Private Mortgage Insurance you can free up some much needed cash, which will certainly make your life easier.

 

Tips and Tricks for Reducing Your Mortgage

Tips and Tricks for Reducing Your Mortgage- 150x150Depending on the amount borrowed for your mortgage loan and many other factors, like the interest rate and the loan repayment term, monthly mortgage payments can be as high as several thousand dollars and is most likely your largest monthly bill. Reducing your mortgage will make payments smaller, saving you money and making your life easier. Whether your monthly mortgage payment is very high or not, saving money is something that benefits everyone, especially those who are going through financial issues. Fortunately, there are some tips and tricks for reducing your mortgage that every home owner should know about.

Tips and Tricks

  1. Refinance your home. Taking out a new loan, with different terms, to pay for your mortgage could be the best way to save money and reduce your mortgage. Refinancing into a lower interest rate loan will drastically reduce your monthly payment and make your mortgage easier to pay. However, the mortgage refinancing process can be fairly expensive, so you should take all costs into account if you decide to take this route. Also, because you will mostly be paying interest towards the beginning of the loan, it’s important to refinance as soon as possible and obtain a lower interest rate, saving more than if you refinanced later into the repayment period when you won’t be paying so much interest on the loan.
  2. Cancel private mortgage insurance. If you couldn’t afford to make the 20 percent down payment, then you are probably paying for mortgage insurance, as this is required for those who can’t make the minimum down payment. Private mortgage insurance can mean thousands of dollars monthly. If you have repaid enough of the loan to gain at least 20 percent equity in your home, then you can contact your lender and discuss cancelling your private mortgage insurance. Your lender will have your home appraised to determine its value, and cancel your private mortgage insurance. Lenders don’t drop the insurance on their own, so you will have to contact them about this when the time comes.
  3. Shorten the term of your mortgage loan. While shortening the loan term won’t make your monthly mortgage payments smaller but will actually increase them, it will significantly lower the overall cost of the loan. Paying off your mortgage loan quicker means you will be paying less in interest, which can save you thousands of dollars. If you come to the conclusion that you can afford to make larger monthly payments toward your mortgage loan, then shortening the length of your loan is a sure way of reducing your mortgage.
  4. Extend the term of your mortgage loan. If monthly payments start to become a burden, then a way of reducing them is if you extend the length of your loan, for example from a 15-year to a 30-year mortgage. However, this means that you will be paying significantly more in interest, which will increase the overall loan value. You will still be able to make extra payments on your loan, which will pay it off quicker, and your monthly payments will be much lower.
  5. Make extra payments on your loan. While this doesn’t sound like something that will help you reduce your mortgage, making extra mortgage payments will help you pay off the loan quicker and save thousands in interest costs. Of course, if you can make regular extra payments, you should just reduce the term of your loan and pay the higher monthly payments. But making a few extra payments now and then will still be of great help in reducing the cost of your loan, and diminish its term.

Being able to reduce your mortgage depends mainly on your financial situation and budget. Take some time to carefully evaluate your monthly expenses and decide if you can make some changes to your mortgage in order to help you save money.

How to Avoid Ridiculous Private Mortgage Insurance Rates

How to Avoid Ridiculous Private Mortgage Insurance Rates- 150x150When buying a home, you will usually have two choices: you can make a 20 percent down payment if you have the available funds, or you will have to pay private mortgage insurance (PMI). The private mortgage insurance will protect the lender in case you default on your loan.

Paying private mortgage insurance may sound like a simple way to buy a home if you can’t afford a hefty down payment, but you may actually be better off opting against PMI.

Reasons to Avoid Private Mortgage Insurance

Private mortgage insurance makes great sense for lenders, as it protects them in case you can’t afford to make your mortgage payments anymore. But for you, the home buyer, it has a few big disadvantages, which should determine you to try and pay the 20 percent down payment instead. Here are the reasons why you should avoid paying PMI:

  • The cost. Private mortgage insurances usually cost between 0.5 and 1 percent of the entire mortgage loan amount. This may not sound like much, but, on a $200,000 loan, you would end up paying up around $2000 per year, and that’s not exactly pocket change. With the average price of a house in the United States being over $200,000, you would be paying around $200 more per month on top of your mortgage payment.
  • Not tax-deductible. This is not always the case, and it depends on you and your spouse’s income. If you and your significant other earn less than $110,000 per year, than the PMI is tax-deductible. However, if you file your taxes separately, the limit is only half of that.
  • Hard to cancel. When the equity in your home reaches 20 percent, you won’t be required to pay private mortgage insurance anymore. Unfortunately, canceling your PMI is not as easy as you might think. You will be required to request the cancellation in writing and have your home appraised, and in most cases this process can take as long as a few months.

How to Avoid Private Mortgage Insurance

Because private mortgage insurance is mandatory if you don’t have the required down payment, the best way to avoid it is by finding a way to pay the 20 percent. If, however, there is no chance of coming up with the down payment, some lenders still offer a 80-10-10 piggyback mortgage loan, which can help by using a second mortgage and your down payment to make the loan-to-value ratio of the first mortgage smaller.

Alternatively, you could build up equity in your home, and apply for a PMI cancellation, but this may take a while as you will be required to have your home appraised. Another way in which you could get rid of private mortgage insurance is by refinancing, but this only makes sense if the new loan doesn’t require PMI and you qualify for a lower interest rate. Refinancing can be very costly, so you will need to do your homework before you go down that road.

Private mortgage insurance is expensive and it is recommended to pay the 20 percent down payment instead of thousands in insurance. The alternatives must be weighed carefully, as they could turn out to be more expensive than private mortgage insurance.

Combination Mortgage Loans Could Be the Answer for You

Combination Mortgage Loans Could Be the Answer for You- 150x150Becoming a home owner is one of the main goals in every American’s life. But to achieve this goal, you will probably need to borrow money, and that can be a pretty nerve-wracking process. You want to make sure that you are getting the best deal on your mortgage loan, but that can be hard with all of the mortgage loan options that are available today. One of the ways in which you can save money is the combination mortgage loan.

A combination mortgage loan allows you to combine two loans, preferably from the same lender in order to pay off your mortgage. Typically, the first loan will represent 80% of the property’s value, while the second one will be 20% of the home’s value. The smaller loan can be used as a down payment or to finance the construction costs of your new home, while the second will be used to pay off the first loan, and will become the permanent mortgage loan on your home.

Benefits of a Combination Mortgage Loan

Combination loans feature a few benefits over regular mortgage loans, but whether this type of loan is your best choice will depend entirely on your financial situation. Here are the benefits that a combination mortgage loan has to offer:

  • You avoid paying private mortgage insurance. With conventional loans, you will be required to pay private mortgage insurance (PMI), which can increase the overall cost of the loan significantly. The cost of the mortgage insurance can sometimes even exceed the cost of the second mortgage loan.
  • You don’t have to make a down payment. Even though the terms are different from one lender to another, the two loans generally serve the same functions: the first mortgage loan will pay off the mortgage, and the second one will cover the down payment.
  • You’re able to get lower interest rates. Each one of the individual mortgage loans in the combination loan will receive a different interest rate. The interest on the larger loan will be smaller, usually making your total interest rate smaller than on a conventional loan.

Disadvantages of a Combination Mortgage Loan

Even though combination mortgage loans can be very beneficial, they are just one of the many types of loans that you should research before choosing. Combination loans might sound good at first, but if you don’t thoroughly research the disadvantages, as well, you could quickly end up regretting your decision.

When paying your mortgage through a combination loan, you will have to keep track of two separate monthly payments, to two different lenders, in some cases. This increases the chance that you will miss a mortgage payment which will hurt your credit. Also, there is a chance that the interest rate for one of the loans will be high, which could increase the overall cost of the loan.

Combination mortgage loans are generally a great choice when you are looking to avoid paying private mortgage insurance, but, as with any mortgage loan, you must exercise caution when choosing this type, and avoid making your decision based only on advantages. Your financial situation and the loan’s disadvantages should also play a big part in your decision. The only way in which you can be sure that you are making the best choice is by being fully aware of where you stand financially and doing your homework.

10 Clever Ways to Save Money Using Home Buyer Tax Deductions

Top 10 Tax Deductions for Home Buyers-150x150Buying a home is a dream come true for most people. While becoming a home owner usually involves a great financial sacrifice, it does come with some perks, besides owning your own home, of course. Many expenses related to your home are tax deductible, and these deductions apply to any type of home: town house, apartment, mobile home, single family residence and more. Unfortunately, this will complicate your taxes, but the extra effort put into detailing your deductible expenses is well worth it.

From the time you become a home buyer until you decide to sell, your home will provide a lot of tax benefits. Consulting a professional advisor in order to get all the details is always a good idea, but here is a list of the top 10 tax deductions for home buyers.

Top 10 Deductions

1. Mortgage Interest Deduction. If your mortgage loan is less than $1 million, then the interest that you are paying is tax deductible. For the first few years, your monthly payment will be mostly made up be interest, so this tax deduction will make our home more affordable, especially if you are a first time home buyer.

2. Points Deduction. When taking out a mortgage loan, your lender charges you a variety of fees. One of these fees is called “points” and one point equals 1 percent of the principal on the loan. Unlike in the case of a mortgage refinance, where the points are deducted over the life of the loan, when buying a home with a mortgage loan, the points are fully deductible up front.

3. Interest Deduction on a Home Improvement Loan. If you take out a loan in order to make “capital improvements” to your home, be aware that the interest on this loan is tax deductible. Capital improvements are improvements to your home that increase its value or extend its life, and should not be confused with simple repairs. In case of a loan taken out for repairs to your home, the interest will not be deductible.

4. Equity Loan Interest Deduction. A portion of the interest that you paid on a home equity loan or line of credit can be deducted, but there is a limit set by the IRS on how much you can treat as home equity. This limit is $100,000 for a family or $50,000 per each member of the married couple, or the home’s market value.

5. Property Taxes Deduction. A large part of your monthly mortgage payments will be represented by property taxes. The amount is held into an escrow account in order to pay the property taxes yearly. You can only claim this tax deduction when the money is taken out of the escrow account and paid.

6. Private Mortgage Insurance (PMI) Deduction. When getting a mortgage loan, if your down payment is less than 20 percent, you will usually be required by your lender to pay a Private Mortgage Insurance. This type of insurance can represent a large portion of your monthly payment, and it is tax deductible, but only for those who qualify.

7. Selling Profit Deduction. Up to $250,000(or $500,000 for a married couple) of the profit that you or your family make from selling your home is tax deductible, with the condition that you have owned your property for at least 2 years and the home has been your primary residence for 2 of the past 5 years.

8. Home Office Deduction. If part of your home is used as an office, you will be able to deduct a percentage of your mortgage and utilities. There are a few requirements, in order to qualify for this deduction: your home office has to be your primary office location for your business, it must be used only for business, and its size has to be realistic.

9. Health Related Improvements Deduction. Making improvements for medical reasons to your home can be tax deducted, as long as the improvements are made for a chronically ill person.

10. Moving Expenses Deductions. If buying your home is a result of your need to relocate for work, then you might be able to deduct the cost of moving and other related costs. However, your new job must be more than 50 miles further from where your old job was.

Buying a home can provide some important benefits when the time comes to file your federal tax return. From deducting your mortgage interest, to tax deductions related to your relocation, there are a lot of areas in which you can save money, as long as you qualify and do your research.

Understanding Private Mortgage Insurance

Q&A-Understanding Private Mortgage Insurance- 150x150Question: I am unclear on specifics with private mortgage insurance (PMI).

1. Why can the price can range from 80-300 for the same loan amount? 
2. How and when does it actually disappear when your loan-to-value is below 80%? For example- does that mean another appraisal is needed or does it go off of the purchase price, and what if you just happened to have an appraisal recently?

Understanding PMI Specifics

Answer:  Mortgage insurance rates vary from one type of mortgage to the other. Depending on the type of mortgage you’ve taken out, your mortgage premiums will depend on the rate capped on your mortgage type. Various types of mortgages include subprime, nonconforming, and jumbo, among others.

There are several factors affecting private mortgage insurance. They include:

1.    Loan-to-value (LTV) ratio

PMI heavily relies on the LTV ratio. LTV is the amount of the loan in relation to the value of the home expressed as a percentage. Most mortgagors require the mortgagee to purchase a mortgage insurance cover when the balance on the loan exceeds 80 percent of the home’s purchase price. The table below shows how LTV ratio affects the PMI rate.

As a general rule the higher the LTV, the higher the cost of insurance. A $350,000 loan at 85 percent will cost more to insure in comparison to a $150,000 loan at 85 percent. Similarly, a $120,000 loan at 85 percent will cost more to insure in comparison to a $120,000 loan at 90 percent. Mortgage insurance stops at the point when you’ve built 20 percent equity in your home. This is achieved when your LTV ratio has reached 80 percent. To discontinue insurance premiums, you should report to your lender so that they instruct your mortgage insurer to stop charging you mortgage insurance.

LTV

PMI Rate
for 30 year mortgage

PMI Rate
10, 15, 20 year mortgage

80.01% – 85%

.32

.19

85.01 – 90%

.52

.23

90.01% – 95%

.78

.26

95.01% – 97%

.90

.79

 

2.    Types of PMI

There are three types of PMI:

(a)   Borrower-paid PMI- it is the most popular option. The cost of insurance is added to the mortgage price and the lender pays it in the normal monthly principal repayment. The lender then submits it to the insurance company on your behalf.

(b)   Lender-paid PMI- the PMI rate is added to the current mortgage rate so that the borrower doesn’t have to make separate payments. Since PMI isn’t deductible, you’ll enjoy interest deductions because it is combined with the mortgage rate. This means that a borrower with a lender-paid PMI is likely to pay a lower amount to the mortgage insurer than the borrower with a borrower-paid PMI.

(c)    Piggyback loan- it is referred to as a “piggyback” loan because a second mortgage is pinned to the original mortgage and it simultaneously closes with the original mortgage. There are several variations, but many lenders use the 80-10-10 criterion. Here, the borrower can take an 80 percent first mortgage, automatically avoiding PMI. The second mortgage becomes 10 percent and the other 10 percent is cleared as a down payment.

3.    Location of the property

The location of a home influences PMI premiums significantly. A home located in a place where the value of homes is consistently declining will be charged a higher mortgage insurance rate or even fail to be covered completely. In some parts of the country, condominiums are charged higher mortgage insurance rates than single-family homes because they are prone to value volatility. The location of a home can therefore cause a significant difference in the mortgage insurance payable on the same type and amount of loan for different borrowers.

4.    Borrower’s credit score

The credit score of a borrower affects the interest rate on any type of mortgage. The impact can be so huge as to exceed the mortgage rate, resulting in hundreds of dollars of additional expenses. PMI has been designed to protect the mortgagor from default. Even though various ways can be used to structure a mortgage to avoid PMI, a poor credit score may hamper such efforts.

Lenders use the borrower’s credit score to gauge the risk of default. Therefore the lower the borrower’s credit score, the higher the PMI rate. This means that two borrowers in the same loan category and amount can pay different insurance costs. The FICO credit score ranges from 350 to 850 and most Americans lie between 600 and 800. A score below 620 qualifies in a subprime mortgage category, which has a higher PMI charge than other types of mortgage loans.

 

Insurance Coverage for Homebuyers

homeowners-insurance-150x150When home buyers begin loan negotiations with their lender or broker, they will come across the requirements regarding various types of insurance needed to finalize the deal. Some types are mandatory, and will be added to the closing costs or monthly payment obligations. Other types are optional, but may be included to assist the borrower in offsetting specific risk factors to the home, such as flood or home life insurance, or additional home warranty protection.

Homeowners Insurance

This type of insurance coverage protects against many risks involved pertaining to damage of the home or other structures on the property. It also covers the loss of any personal possessions such as clothing or furniture, the liabilities and medical costs of injuries to individuals while on the homeowner’s property, theft or vandalism, and even the temporary relocation costs during loss of use while repairs are made to the home. The yearly expense is based on the value of the home, and the extent of coverage sufficient to satisfy the lender in terms of adequate collateral protection for the mortgage.

Private Mortgage Insurance

This is necessary in cases where the home buyer puts up less than the 20% down payment requirement toward the purchase price. Its primary purpose is to protect the lender against loan default, and allows the borrower to purchase the home with only a 3% to 5% down payment. Depending on the loan type and down payment, a borrower can generally expect to make monthly payments of between $50 and $80 per $100,000 borrowed. However, once a 20% equity is achieved toward the loan principle, this insurance can be cancelled. In some cases, the premiums are even tax-deductible.

Title Insurance

With the home acting as collateral for the lender, this type of insurance covers both lender and buyer against past encumbrances that could affect the ownership status of the home buyer, along with the legal rights to transfer the title to other individuals. This insurance is generally between 0.3% to 0.5% of the price of the mortgage amount, though can be shopped for the most affordable cost.

Having some kind of insurance, whether it’s one of the above or not, is highly recommended. It is important to protect your investment physically in terms of your house’s structure and appearance as well as financially.

Down Payments

down-paymentBetween finding the perfect house to buy, searching for affordable home mortgage rates, deciding on a lender or broker, and making sure the credit scores are in good order, there is the down payment challenge for the potential home-buyer to factor into the financial formula. It is easily one of the most difficult of hurdles for the home-buyer to manage, and even more so for those in the lower range of income bracket, and those contemplating purchasing a home for the very first time. Luckily, many lenders are becoming more flexible in granting approval with smaller down payments.

Generally, lenders require a range between 5, 10, or 20% of the purchase price, with a few 0%-down loan programs available. If a borrower can offer funds in the 25 – 30% range, then lower credit scores can be less of a factor, along with income verification. If a borrower falls below these thresholds, the lender will more than likely request private mortgage insurance, or PMI, to cover the risk. The bottom line strategy is – the more money down, the lower the monthly payment, or, the more ‘house’ a borrower can consider buying.

In simple terms, and following the required 28% monthly payment-to-income ratio, and the 36% debt-to-income ratio, a benchmark monthly mortgage payment of $933 can be used as an example. With an interest rate of 7.5% applied to a 30 year fixed-rate loan, the total principle would be $133,435.45. By offering 10% down on the loan, the mortgage payment would cover a home costing $148,262.00. Offering 20% as a down payment would boost the ‘available’ home purchase price to $166,794.

With this in mind, it is also best if the borrower has the necessary down payment funds secured at least 60 days prior to beginning the application process. In addition, it is wise to forgo or postpone other cash outlays or credit applications, as well as making sure sufficient funds for the closing costs are on hand, and the credit scores have been reviewed and mistakes rectified for the best chances for lender approval.