Tag Archive for: Home Buying Tips

Doctor Loans: What You Need to Know

/0 Comments/in /by

The Doctor Loan has a long history in the United States. First offered to attract new physicians to growing towns in the Wild West, they have evolved over the year. Today, 18,000 new physicians graduate from medical school every year. New physicians can have very specific credit and income profiles that represent a different kind of risk, not reflected in a normal borrower profile.

Image of a doctor reading someone's blood pressureWhat Is a Physician Mortgage Loan?

A physician mortgage loan is a low down payment mortgage available to physicians, dentists and other eligible medical professionals. They do not require mortgage insurance and are often considered jumbo mortgages as they allow higher loan balances than conventional and FHA mortgage loans. These doctor home loans have fewer restrictions for borrowers than conventional loans because lenders generally trust doctors to be responsible borrowers.

At Michigan Mortgage, we’ve made it easy for doctors to get a physician mortgage.

The Michigan Mortgage Physician Mortgage Loan Program

That is why Michigan Mortgage has a very specific program designed for that type of individual. Physicians of all types can benefit from our “Doctor Loans.” Features of the program include:

  • Available for new residents, new attending (7-10 years out of residency), or to physicians at any stage of their career.
  • Flexible down payment options.
  • Private mortgage insurance (PMI) is not required.
  • Rather than looking for past income, we will consider an employment contract as documentation of future earnings (instead of pay stubs.
  • The loan amount can go all the way up to $2 Million.
  • Can be used for primary or second home.
  • Certain programs allow new Physicians to use gift money for a down payment, for required reserves, or for closing costs.
  • Often doesn’t calculate student loans the same way as standard underwriting. Student loans are not counted as part of debt-to-income ratio (DTI).

Other than a doctor loan, physicians are also available for other loan types.

Conventional Mortgage: Often this is the best choice for borrowers. Conventional loans generally offer the most term options and lowest fees, with the lowest rates. Conventional loans do require proof of earnings and a substantial sum of money (20% of mortgage amount) to put down.

FHA Loan: This loan can have higher fees and rates than a conventional mortgage. FHA mortgages can have a smaller required down payment, and a monthly mortgage insurance premium. This loan requires the lender to use the credit report amount of the student loan payment, or if none listed, 1 percent of the outstanding balance unless the borrower can provide documentation that the loan is in deferral. The interest rate could be slightly lower than a Doctor Loan but could wind up costing more because of PMI costs.

VA Loan: This loan requires that you qualify for VA benefits. There is no down payment or mortgage insurance requirement. Rates are similar to FHA rates, but the funding fee is slightly higher.

Ready to get started with a Doctor Loan? Give us a call and we will guide you through the process!

This blog post was written by experts at Mortgage 1 and originally appeared on www.mortgageone.com. Michigan Mortgage is a DBA of Mortgage 1. 

Buying a Home with Zero Down

/0 Comments/in /by

What is a “Zero-Down” Loan?

A zero-down home loan is a no-down-payment mortgage offered by the United States Department of Agriculture (USDA) for eligible rural and suburban home buyers.

You might be thinking, “but I don’t live in a rural area.” That’s OK. While the purpose of the USDA loan program is to boost home ownership in rural areas, the USDA’s definition of “rural” is wide ranging and includes many villages, small towns, suburbs and exurbs of major U.S. cities.

These loans are issued through the USDA Rural Development Guaranteed Housing Loan Program. USDA loans have been available since 2007. They are generally intended for low- or moderate-income borrowers.

What Are the Benefits of a USDA Loan?

USDA loans offer many benefits over traditional mortgage loans.

  • $0 down payment. This is the obvious benefit.
  • Competitive interest rates. USDA loans typically offer some of the lowest interest rates on the market. Interest rates on USDA loans are determined by several contributing factors, however the primary factor is your credit profile, as is the case with all mortgage options. Those with higher credit scores often receive the most competitive rates, although borrowers with less than stellar credit may still qualify for a low rate due to the USDA guarantee.
  • Low monthly mortgage insurance
  • Lenient requirements. USDA loans are designed to provide homebuyers with lenient eligibility requirements that help low-to-moderate income purchasers obtain a home.

USDA Loan Eligibility

At a minimum, USDA loan program guidelines require:

  • U.S. citizenship or permanent residency
  • Ability to prove creditworthiness, typically with a credit score of at least 640
  • Stable and dependable income
  • A willingness to repay the mortgage, as indicated by at least 12 months of no late payments or collections
  • Adjusted household income is equal to or less than 115% of the area median income. See here for income guidelines.

A credit score of 640 or above usually helps eligible borrowers secure the best rates for a guaranteed USDA loan with zero down payment. Such a score also rewards you with a streamlined or automated application process.

You can still qualify for a USDA loan if your credit score falls below the margin or if you have no credit history at all. However, the interest rates may not be as favorable. In addition, applicants with no traditional credit history may still qualify for these loans. However, you’ll need to show a reliable financial standing through evidence like timely utility or tuition payments.

How Do I Apply?

Applying for a USDA loan is pretty straightforward.

The first step is to choose a USDA lender, such as Michigan Mortgage. We specialize in USDA loans. Once you are working with us, we’ll find out what home you are interested in, where it’s located, your asset and debt situation, and how much you need to borrow. We will conduct a credit check to assess your credit score, just as we do with a traditional mortgage.

Once all that is done, we’ll ask you to provide documentation, including:

  • Government-issued ID
  • W-2 statements
  • Recent pay stubs
  • Bank statements

The application process is pretty easy, really. Our loan officers are skilled at making everything go smoothly and helping you navigate the process and get you in your home as soon as possible.

This blog post was written by experts at Mortgage 1 and originally appeared on www.mortgageone.com. Michigan Mortgage is a DBA of Mortgage 1. 

Image showing a graph being analyzed

Conventional, FHA or VA: Which Loan is Right for You?

/0 Comments/in /by

When it comes to getting a home loan, there are a number of options available to U.S. home buyers, but there are three programs that seem to be the most requested.

  • Conventional
  • FHA
  • VA

What are the differences in these loan types, and which is right for you? We’ve got the answers.

No matter which loan type you are considering, get started fast with Home Snap.

Image showing a graph being analyzedConventional Loan

Conventional loans are the most popular mortgage loan in the US. Conventional loans make up nearly three quarters of all home loans in the country. At Mortgage 1, this percentage holds true, also, according to Mortgage 1 CEO Mark Workens. Michigan Mortgage is a DBA of Mortgage 1.

What is a conventional loan?

A conventional loan is a mortgage that is not insured or guaranteed by the government. Instead, the loan is backed by private lenders. With a conventional loan, insurance, if there is any, is paid by the borrower.

Why do so many home buyers go with a conventional loan?

One reason is flexibility. Conventional loans can be obtained for a variety of lengths and for a wide range of terms. Provided you put down at least 20 perfecnt, conventional loans don’t require any mortgage insurance. And conventional loans can be used for second homes or vacation properties.

Here’s a summary of conventional loan pros and cons and who they are best suited for.

Pros of conventional loans:
  • Low interest rates
  • Fast loan processing
  • Variety of down payment options, starting as low as 3% of the home’s sale price
  • Various term lengths, ranging from 10 to 30 years
  • Reduced private mortgage insurance (PMI), if needed
Cons of conventional loans:
  • Require good credit score
  • Require 20% down payment to avoid insurance
  • More stringent eligibility requirements
Conventional loans are good if:
  • You have a good or excellent credit score and can qualify for a low interest rate.
  • You’re purchasing a second home or a vacation home.
  • You’re purchasing a property you plan to fix up and flip or rent.
  • You will make a 20 percent down payment and won’t need PMI.
  • You want a shorter loan term or flexible terms, (e.g., a variable-rate mortgage).

FHA Loan

An FHA loan is issued by a federally approved bank or financial institution that is insured by the Federal Housing Administration. The FHA is the largest mortgage insurer in the world. It has insured more than 47.5 million properties since 1934.

With an FHA loan, the FHA isn’t lending you the money. Instead, the FHA insures the loan, which means if you fail to make payments and the house is foreclosed, the FHA absorbs the cost.

Pros of FHA loans:
  • Minimized credit qualifications
  • Reduced down payment requirements
  • Lower closing costs
Cons of FHA loans:
  • 75 percent upfront mortgage insurance premium required at closing, regardless of down payment amount
  • Monthly mortgage insurance payments for the life of the FHA loan if the down payment is less than 10 percent. It can be canceled after 11 years if the down payment is 10 percent or more.
  • Limited to owner-occupied properties
  • Loan limits are lower than those of conventional mortgages
FHA loans are good if:
  • People whose house payments will be a big chunk of take-home pay.
  • You have a lower credit score.
  • You will be making a smaller down payment
  • The purchase price meets FHA mortgage limits

VA Loan

A VA loan is a mortgage loan that’s issued by private lenders and backed by the U.S. Department of Veterans Affairs. It helps U.S. veterans, active duty service members, and widowed military spouses buy a home. To qualify for a VA loan, you must meet one of the following criteria:

  • Be an active duty service member or an honorably discharged veteran who has 90 consecutive days of active service during wartime or 181 days of active service during peacetime.
  • Have served more than six years in the National Guard or the Selected Reserve.
  • Are the spouse of a service member who died in the line of duty.
Pros of VA loans:
  • No down payment
  • No minimum credit score requirement
  • No limit to the amount you can borrow
  • No PMI insurance requirements
  • Don’t need to be a first-time home buyer
Cons of VA loans:
  • Must be military member or veteran
  • Required to pay a VA loan funding fee between 1.25% and 3.3% of the loan amount
  • Can only be used for primary residences
VA loans are good if:
  • You or your spouse are military service members or veterans
  • You don’t have money for a down payment.
  • Your credit score is fair or poor
  • You plan to occupy the home

If you have questions about a loan program listed above, please reach out. We’re here to help in any way we can.

This blog post was written by experts at Mortgage 1 and originally appeared on www.mortgageone.com. Michigan Mortgage is a DBA of Mortgage 1. 

FICO Credit Score

Five Tips to Improve Your Credit Score

/2 Comments/in /by

Your three-digit credit score can make or break your financial future.

Interested in buying a home? Your credit score will determine whether or not you qualify. Looking to buy a new car or recreational vehicle? Your credit score will determine your interest rate. Hoping to take out a personal loan to invest in your child’s future? You need to have good credit to do so.

If your credit score isn’t up to par, we’re here to help! But before we offer you tips to improve your three-digit score, we want to make sure you understand how your score is calculated.

A combination of five factors determines your FICO credit score; some factors impact the score more than others. Take a look at the graph below to better understand.

FICO Credit Score

FICO scores can range from 300 to 850, but for mortgage purposes, your goal should be 680 or above.

Here are five tips to help you reach that 680 benchmark.

  1. Make sure your credit reports are accurate. Lenders analyze reports from three credit bureaus when you apply for a mortgage – Equifax, TransUnion and Experian. If you don’t have a copy of your reports, you can claim a free report from each bureau once every 12 months at annualcreditreport.com. Mistakes are known to happen, and reporting errors can have a negative impact on your score. If you find a credit reporting error, dispute the mistakes with the appropriate credit reporting agency and your score may improve.
  2. Make your payments on time. According to experts, a large portion of your credit score (35 percent, to be exact) is calculated based on payment history. Making your payments on time, every time can greatly impact your score. This includes credit card bills or any loans you may have, such as auto loans or student loans, your rent, utilities, phone bill and so on.
  3. Reduce the amount you owe. Roughly 30 percent of your credit score is calculated based on the amount of debt you owe. Most loan programs have very specific debt-to-income ratios in place that can keep you from purchasing your dream home. For the ultimate credit score boost, credit experts suggest you pay on time, twice per month, and decrease the amount you owe. This will help control the factors that collectively make up 65 percent of your score.
  4. Become an authorized user on someone else’s credit card account. This is easier said than done, but if your spouse or parent has excellent credit and a perfect payment history, it would benefit you (and improve your credit score) if you were added as an authorized user on their credit card account. Why? The account will show up on your credit report as well as the credit utilization rate and all the on-time payments associated with the account, which will naturally increase your score.
  5. Open a secure credit card. Opening a secure credit card, and using it properly, can help to increase your credit score. You’ll be required to deposit money into a checking account to secure the line of credit. Payments will come directly out of this account, so they will always be on time and will never be missed.

Your credit score won’t improve over night, but with a little hard work and dedication, you’ll be moving into your dream home in no time.

Analyzing Your Current Financial Situation

/0 Comments/in /by

Long before you make an offer on your dream home, it is important to honestly look at your current financial situation.

Variables such as your credit score, employment history and how much you have saved for a down payment can greatly influence the type of loan that you qualify for. Equally as important, the type of loan you qualify for can impact how viable and attractive your offer is to a potential seller.

It is important for you to analyze your spending habits. If you do not have a budget, you should start one now. This will help you understand you spending habits so that the lifestyle that is important to you will be maintainable as a homeowner.

One of the most important considerations is how comfortable with your monthly payment. For a great app to calculate a payment, click here.

As a rule of thumb, total housing costs should be no more than 25 percent of your net pay. So, if your net monthly household income is $3500 per month, a safe mortgage payment would be $875. No two households have the same expenses, so it is important to honestly look at what your expenditures are when you do a budget.

Note that lenders do not use net income when they calculate your debt to income. They use gross pay.  The formula they use oftentimes (but not always) allows you to borrow more than you may be comfortable with or should spend. I call this giving you enough rope to hang yourself. No one wants to be house poor and feel strapped paying for a mortgage they really can’t afford. That is why knowing your budget, comfort level is so important.

It is also important that you are aware of the expenses prior to closing.

  1. Earnest Money or Good Faith Deposit
  2. Home Inspection
  3. Appraisal Fee
  4. Closing Costs and Pre-Paids

These costs vary and some of them can be paid on your behalf by the seller. Additionally, it is a good idea (and sometimes required by financing) that you have a few months mortgage payments in reserves, any moving costs, furniture, appliances, etc. You can typically estimate how much you will need for these costs by getting pre-approved for a loan by a lender that you trust and is highly recommended to you.

Your credit rating is a primary factor in qualifying for a mortgage.

The type of loan, down payment required and the interest rate you qualify for are all dependent on your credit score. Sometimes you will need funds to pay down credit or pay off derogatory credit.

It is important to  consider all of these variables well in advance of looking for a home to purchase. Make sure you have enlisted a trusted advisor who can guide you through this process so that when the time comes, you will be in tip-top shape to purchase your dream home.

Michigan Tax Tips

Tax Tips for Michigan Residents

/0 Comments/in /by

It’s that time of year again! No, I am not talking about March Madness or the finale of “The Bachelor” … It’s tax time! For some (like self-employed people) that have not been paying quarterly taxes, it is a time to pay the piper. But for the vast majority of us, it is the time of year where we can actually get a tax refund.

Michigan Tax TipsSo, what is the best use of those funds? Like most questions, the answers vary depending on the individual situation. If you are swimming in debt it may be time to pay some of that debt off. If you have not funded your 401(k) for the year, perhaps that money is best used to invest in a tax deferred plan.

If, however, you are not taking advantage of all the benefits, of home ownership, it may be the perfect time to purchase a home. The average tax refund these days is about $2,800. Many loans only require that you put between 1 percent and 3 percent down. This means you may have enough money to close a loan with only the refund.

Did you know that the average monthly rent payment in our area is more than the average monthly mortgage payment?  For example, the average monthly rent in Muskegon (February 2020) is $880. The medium home price is $128,000. After just 3 percent down, the payment with taxes and insurance would be about $830.

So, on average, the monthly expenditure owning a home is less than renting. But even if the payment was higher on the mortgage payment it would most likely still be beneficial to own? Why? Two main reasons: appreciation and amortization.

Appreciation: Appreciation is the rate at which the value of something increases in value. The average appreciation in our area is about 3.8 percent for real estate. For the last five years has been 6.3 percent!  On $128,000, the forecasted appreciation gain in the next nine years (using only 3.4 percent) is $45,466! Compare that to rent where the is obviously $0.

Amortization: The second reason is amortization gain. Remember, while the amount you owe on a mortgage goes down over time and the payment stays the same, on a rental the amount you pay for rent will likely continue to go up.  In 9 years, you’ll pay over $22,000 down on the home. When you rent, you’re just paying down your landlord’s mortgage.

So even assuming the cost of a Real Estate sale’s commission sale of 6 percent, in nine years you are $55,000 richer when you buy a home vs. renting.

Given this, as well as the emotional and text benefits of home ownership, tax time may be a great time to buy.  Call me if you would like to talk further about your specific options.

Image showing a large home

Cash-Out Refi vs. HELOC: Which Should You Choose?

/0 Comments/in /by

Many homeowners, at some point in their lives, need extra cash. The reasons people need a quick cash infusion could be one of many:

  • Major home improvement
  • New vehicle
  • Wedding
  • College
  • Vacation
  • Unforeseen emergency

And who hasn’t heard the story of a now-successful billionaire entrepreneur who put it all on the line to fund a startup by either remortgaging his house or taking out a home equity loan?

The reasons people need money are as plentiful as there are leaves on the trees.

Image showing a large homeHome Equity at All-Time High

With mortgage rates low and home equity rising, it makes sense that people would tap the value of their single biggest investment – their house – for extra funds when the time comes.

According to MSNBC, in October, 2018, untapped home equity — the difference between a property’s value and the amount owed on it — stood at an all-time high of $14.4 trillion.

In June of this year, total refinance volume was up 79.5% from the same week a year ago, which is the highest level since January 2018.

The same can’t be said for home equity lines of credit (HELOC), however. Demand for HELOCs collapsed to 15-year low earlier this year.

Why the difference? And what should you choose if you find yourself in need of extra money?

Refi vs. HELOC

To appreciate the reason for these trends, it’s important to understand the difference between a refinanced mortgage and a HELOC. Here are summaries of the two taken from the website Investopedia.

  • Refinance: “A refinance occurs when an individual revises the interest rate, payment schedule, and terms of a mortgage. Debtors will often choose to refinance a loan agreement when the interest rate environment has substantially changed, causing potential savings on debt payments from a new agreement.”
  • HELOC: “Home equity loans and HELOCs both use the equity in your home—that is, the difference between your home’s value and your mortgage balance—as collateral Because the loans are secured against the value of your home, home equity loans offer extremely competitive interest rates—usually close to those of first mortgages. Compared to unsecured borrowing sources, like credit cards, you’ll be paying far less in financing fees for the same loan amount.”

So when it comes to tapping the rising equity in your home, which should you choose?

Cash-Out Refi

In the world of refinance, there are many different types. But in the current climate of low rates and rising equity, one refinance option stands out among the crowd when it comes to getting cold, hard cash for the value of your home: cash-out refinance.

“Cash-outs” are common when the underlying asset – aka, the value of a house — increases in value. With a cash-out refi, you withdraw equity of your house or condo in exchange for a higher loan amount. A cash-out refi lets you gain access to the value in your house via a loan rather than by selling it. This option gives you access to cash immediately while still maintaining ownership of your house.

Here’s a scenario:

  • Your home is worth $300,000
  • You owe $200,000
  • Thus, you have have $100,000 in equity

With cash-out refinancing, you could receive a portion of this equity in cash. If you wanted to take out $40,000 in cash, this amount would be added to the principal of your new home loan. In this example, the principal on your new mortgage after the cash-out refinance would be $240,000.

What’s Right for You?

Of course, everyone’s situation is different. And you should consult with your financial advisor before making any big move. But, in general, a cash-out refinance makes sense in a number of situations:

  • When you have the opportunity to use the equity in your home to consolidate other debt and reduce your total interest payments each month
  • When you are unable to get other financing for a large purchase or investment
  • When the cost of other financing is more expensive than the rate you can get on a cash-out refinancing

Another advantage of cash-out refis is that you are free to use the cash in just about any way you want.

If you are considering a cash-out refinance or have questions about refinancing options, give us a call!

This blog post was written by experts at Mortgage 1 and originally appeared on www.mortgageone.com. Michigan Mortgage is a DBA of Mortgage 1. 

Image showing building blocks

What is debt-to-income ratio?

/0 Comments/in /by

Your debt-to-income (DTI) ratio is the percentage of your income that goes toward paying your monthly debts. DTI can often be overlooked as many people assume that a good credit score and a high income are the only two factors needed to be taken into consideration when seeking to purchase a home.

Image showing building blocksHowever, for many lenders, that’s not enough to be considered a good mortgage candidate. As a borrower, your DTI is utilized in various situations to determine your level of risk. For instance, if your DTI is too high, opportunities to make a big purchase, such as a mortgage, may be limited.

How to Calculate Your DTI Ratio

DTI Ratio = (Monthly expenses ÷ Pre-Tax Income) x 100
Start by adding up your monthly bills such as:

  • Rent or house payment
  • Alimony or child support
  • Student loans
  • Auto payments
  • Other

Next, divide your total sum by your gross monthly income (income before taxes). Multiply by 100. Your result is your DTI ratio.

The goal is to keep your DTI ratio as low as possible. The lower the ratio, the less risky you are to lenders. An adequate DTI ratio is below 36 percent. Typically, having a DTI ratio of 43 percent is the maximum ratio you can have in order to be qualified for a mortgage.

Front-End DTI vs. Back-End DTI

There are two variations of DTI: Front-End and Back-End.

A front-end DTI calculates how much of a person’s gross income is going towards housing costs.
Front-End DTI = (Housing Expenses ÷ Gross Monthly Income) x 100

A back-end DTI calculates the percentage of gross income going toward other types of debt (credit cards, car loans, etc.).
Back-End DTI = (Total monthly debt expense ÷ Gross Monthly Income) x 100

The main difference between Front-End and Back-End DTI ratios is that the front-end ratio only considers the mortgage payment and other housing expenses whereas the back-end ratio considers all other types of debt. Lenders will utilize this ratio in conjunction with the front-end ratio to approve mortgages.

Why is Knowing Your DTI Ratio Important?

Your DTI ratio is utilized by lenders as a measuring tool. Your DTI ratio helps lenders determine your ability to manage your finances, specifically, your monthly payments to repay the money you borrowed. Keep in mind that lenders do not know what you will do with your money in the future, so they refer to historical data to verify your income and debt totals. Moreover, your DTI ratio illustrates that you have a sufficient balance between your income and debt, thus, are more likely to be able to manage your mortgage payments.

If you are considering buying a home or have questions about your DTI ratio, give us a call!

This blog post was written by experts at Mortgage 1 and originally appeared on www.mortgageone.com. Michigan Mortgage is a DBA of Mortgage 1. 

Appraisals vs. Home Inspections image

Appraisals vs. Home Inspections

/3 Comments/in /by

As Michigan Mortgage Loan Officer Dave Lehner would say, “Don’t buy a money pit!”

What exactly does that mean?

Appraisals vs. Home Inspections imageAppraisals are required as past of the home-buying process. Home inspections are not, but they may be one of the most beneficial things you can do for your financial future. A home inspection will ensure that you don’t buy a money pit.

Here’s the difference between the two.

Appraisals

  • Required.
  • An appraiser provides a professional opinion of the home’s value. They do not analyze the “systems” of the home.
  • The goal is to make sure buyers are not overpaying for a home.
  • A home is appraised based on size, the number of bedrooms and bathrooms, functionality and recent sales of similar properties in the area.
  • The cost is typically between $400 and $575.

Home Inspections

  • Optional.
  • A home inspector will examine the physical structure as well as the “systems” of the house ranging from the foundation to the roof.
  • The home’s HVAC system, plumbing and electrical components, roof, attic, insulation, walls and ceilings, windows and doors, floors, foundation and basement will be assessed.
  • The home inspector is a licensed professional.
  • Buyers can use the inspection results to renegotiate the purchase price and request that the sellers make home improvements.
  • The cost is typically between $300 and $500.

As lenders, we’re responsible for ordering appraisals before proceeding to the closing table. We have no control over which appraiser is assigned to which home. The homebuyer is typically responsible for paying the appraisal fee.

Because the home inspection is not required, inspectors are hired by the homebuyer. We work with a pool of reliable experts and are happy to recommend one that will best meet your needs. The home inspector is working on the buyer’s behalf, so the cost is paid for by the buyer.

If you have questions about appraisals or home inspections, don’t hesitate to reach out. We’re here to help in any way we can!

How to Eliminate Mortgage Insurance

How to Eliminate Mortgage Insurance

/0 Comments/in /by

Most buyers have heard of Mortgage Insurance and know that it is insurance that does not protect them but rather the lender against them defaulting on the home loan.

What most buyers don’t know is how they can avoid or when it can removed from their mortgage.

Mortgage insurance (MI) comes in the form of a few different names but it is essentially the same thing.

How to Eliminate Mortgage InsuranceConventional loans refer to it as PMI (Private Mortgage Insurance) whereas FHA and Rural Development (RD) refer to it as MIP (mortgage insurance premium).  VA does not have it at all but they have a funding fee on most loans that is added to the principal balance. FHA and RD have a similar add on fee that is called upfront mortgage insurance.

Regardless of what it is called and where it is charged, MI is a fee that lenders use to offset the losses that occur when people don’t pay on their loans.  It is charged to many to pay for the sins of a few.

For conventional loans, if you have 20 percent down, you will not be charged MI.

FHA and RD have mortgage insurance as a monthly fee regardless of the equity position, so even if you put 20 percent down on these loans, you will have mortgage insurance.

I am often asked how clients can get rid of mortgage insurance. Obviously, not everyone has enough savings to put 20 percent down but they don’t want to have this fee on their loan forever.

Again, RD and FHA have it no matter how much you put down, but for conventional loans, there are a couple creative ways to get rid of the mortgage insurance.

Option 1: Pay a fee upfront and not have a monthly mortgage insurance at all. While this helps reduce the total monthly payment, it is not always a wise decision. If the borrower will not be in the loan for long enough to recoup charge to remove it, the benefit it is not advisable to buy out of the MI. Similarly, it does not make sense to buy out of MI in an interest-rate environment that seems to be going down. In other words, if the person is likely to refinance or sell in the next 24 -to-36 months, it probably does not make sense to pay a flat fee to get out of the mortgage insurance.

Given enough time in the mortgage, however, you can save up to 50 percent of what you would otherwise eventually pay monthly.  In other words, paying upfront gives you a discount if you stay in the loan long enough.

Option 2: Have the lender pay it for you. This is called lender paid MI. Buyer beware on this tactic. While this sounds great, there is no free lunch; that maneuver will inevitably increase your interest rate.

Option 3: Get a first mortgage and a second mortgage. Assume a buyer had a 10 percent down payment. They would finance 80 percent of the sale price on the first mortgage but then close the loan with a second mortgage for the remaining 10 percent. It sounds like a great idea until you realize that the interest rate on the first mortgage has a substantial price adjustment when you piggyback it with a second mortgage. Additionally, the second mortgage itself is generally a higher interest rate and oftentimes interest only. In the end, this tactic is not usually worth the effort.

If a buyer opts to have normal monthly MI, which many do, the next question is how does one get rid of Mortgage insurance once they have it?

Previously we mention that that on FHA and RD the mortgage insurance stays on for the life of the loan. This means the only way to eliminate the insurance is to refinance.

For conventional loans, mortgage insurance is eliminated in a couple of different ways.

It is automatically removed once a consumer pays 22 percent off of the originally borrowed loan amount. It can also be removed with an appraisal that shows 20 percent equity. A third way to remove the mortgage insurance is with a refinance.

In an environment where there has been a lot of equity, interest rates have been reduced, and the consumer has paid down the loan enough, refinancing is often times very good option.

All of this is to say that the need for a trusted advisor who manages your debt annually is imperative.   Our job is just beginning once you close your loan. We help you build financial wealth with real estate and manage your debt to your advantage. We are here to guide you.