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A Complete Cash Out Refinance Case Study

Wed, 19 Jan 2022 21:25:35 GMT

If you ever want to tap into the equity in your home to pay off other life expenses, consider doing a cash out refinance. If done properly, you can reduce your monthly debt and/or improve the value of your home.

Home ownership has a long list of benefits. One of the biggest benefits of owning a home is the fact that you build equity in your home with every mortgage payment you make. Additionally, a rising real estate market can accelerate how much equity you build in your home. A homeowner can do a cash out refinance which allows them to tap into the equity in their home. What is a cash out refinance, and why should you care? We’ll cover that in greater detail below, and include a case study from a client we recently helped.

What is a cash out refinance? Similar to a home equity line of credit, a cash out refinance allows the homeowner to tap into the equity in their home to pay for other life expenses. Perhaps the homeowner needs to pay for a medical procedure, purchase a car, pay school tuition or pay for a home renovation. It doesn’t matter, that equity is yours and can be used! However, unlike a home equity line of credit, a cash out refinance is just one single loan. The easiest way to understand this is to view an example. Imagine the following:

Initial purchase price of home = $300,000
Current amount owed on the mortgage = $180,000
Current appraised value = $400,000
The equity you have in your home is $220,000 (or the current appraised value - the current amount owed)

A cash out refinance is when the homeowner uses a new mortgage to pay off their existing mortgage + the amount they borrowed in cash. However, the new loan amount cannot exceed 80% of the appraised value of the home. For example, if your home is appraised for $400,000, your new mortgage on a cash out refinance cannot exceed $320,000.

Continuing on the above example, if the current mortgage had $180,000 in outstanding payments, and you can secure a new mortgage for $320,000, that means you can pull out $140,000 in cash to use as you please!

Why would anyone want to have a new mortgage for $320,000 when they only owed $180,000 on their previous mortgage? There are numerous reasons why! Here are some common options:

The homeowner wants to complete some renovations on their home, but doesn’t have the cash to do so. If they do a cash out refinance, they’ll receive a lump sum of cash and complete costly renovations.
The homeowner wants to pay off debt elsewhere. Perhaps the homeowner has high credit card debt, student debt, or medical bills. Generally speaking, the cost to borrow money on a mortgage is significantly less expensive than the cost of borrowing money via a credit card or personal loan. Reducing your overall monthly debt can save you quite a bit of money, even if it means you have a greater mortgage balance.
The homeowner previously bought their home at a time where interest rates were high, or when they were required to carry mortgage insurance. A cash out refinance can help you roll into a new mortgage that doesn’t require mortgage insurance, and ideally has a more preferential interest rate.

Actual Case Study From a Client

Below we’ll review an actual case study from a client we recently helped - which we’ll call Cynthia for this example.

Cynthia originally purchased her home for $448,500 in January of 2018, and initially put 15% down. She took a loan for $381,225, and her interest rate was 3.875%. Her total monthly mortgage payment for principal and interest was $1,793.

The rising real estate market helped appreciate her home value, which is now $590,000! Additionally, her outstanding loan amount has decreased to $356,000 as she has been paying her mortgage every month since January of 2018.

Cynthia wanted to do a cash out refinance for numerous reasons, which we’ll touch on below. Cynthia obtained a new mortgage for $442,500 at a 2.99% interest rate - which is still available for borrowers with strong credit! Her new principal and interest payment is $1,863, an increase of $70/month. However, she received $83,000 in cash after all closing costs.

What did she do with that cash?

Paid off her solar panels, which she was financing at 7.9%. This saved her $261/month, and she no longer has an electric bill
Paid off two student loans, which had a blended interest rate of 8%. This saved Cynthia $468/month
Cynthia still had cash left over, which she used to update and renovate her bathroom, which only further increased her homes value

When it's all said and done, Cynthia’s monthly mortgage is $70 more per month, however, Cyntia is saving $729 by no longer needing to pay her solar panel debt or student debt. The total monthly savings is $659 or $7,908 a year!

One of the biggest benefits homeownership provides is the fact that homeowners can use the equity in their home to pay for other life expenses. As a renter, you will never be given this option! The current real estate market is primed for cash out refinancing deals. The interest rates are very low, and home prices have surged tremendously in the last 12-20 months. Take advantage of this time and consider using your cash proceeds to pay off other outstanding debt or renovate your home!

If you have any mortgage related questions, please call/text/email anytime. I’ll be more than happy to help you!

Mike McCarthy

Senior Loan Officer

(617) 620 9175 MikeMcCarthyteam@Leaderbank.com

Lender NMLS# : 449250

MLO NMLS# : 176640

Boston | Dedham | Marblehead

New Conforming Loan Limits: What You Need to Know

Wed, 19 Jan 2022 21:14:32 GMT

The new conforming loan limits were just adjusted for 2022. Here’s what you need to know.

As of November 30th, 2021, the Federal Housing Finance Agency, also known as the FHFA, released the new conforming loan limits for 2022. This is important for anyone who is financing a home via a Fannie Mae or Freddie Mac mortgage, as the conforming loan limits put a ceiling on the amount of money they’ll guarantee on a mortgage they issue. This limit is adjusted yearly, and adjusts after factoring in numerous economic conditions and statistics. Here’s everything you need to know about the new conforming loan limits for the upcoming year.

What is a Conforming Loan?

First and foremost, let's formally visit what a conforming loan is. Simply put, a conforming loan is a loan that has to meet specific dollar limits that are predetermined by the Federal Housing Finance Agency. If you’re financing your home via a Fannie Mae or Freddie Mac mortgage, the conforming loan limit is the maximum amount of financing you can receive to purchase a home.

The limit on a conforming loan is also known as the conforming loan limits, or CLL. These conforming loan limits are adjusted yearly. Additionally, that limit may adjust depending on where you are purchasing the home. For example, the conforming loan limit in Los Angeles is higher than the conforming loan limit in Raleigh North Carolina considering the drastically higher cost of living.

2022 Conforming Loan Limit

In 2022, the conforming loan limit is set at $647,200. However, in higher cost of living areas, the ceiling reaches $970,800.

Advantages of a Conforming Loan

The federal government insures loans issued through the FHA, which must meet the conforming loan limits. This is beneficial as it makes homeownership within reach for millions of Americans.
Conforming loans can be easily sold on the secondary mortgage market, which allows financing institutions to issue more mortgages on the primary mortgage market.

Why Did the Conforming Loan Limit Increase?

It’s no secret, throughout 2020 and 2021, home prices have skyrocketed! There are numerous factors that caused the surge in real estate prices, but two of the main reasons include:

The federal government reduced interest rates, which caused more of an incentive for people to borrow money and purchase a home
Due to the COVID-19 pandemic, many people decided to move out of the city and relocate to the suburbs. This surge in demand caused there to be a shortage of supply, which in return boosted home prices.

The Federal Housing Finance Agency had to respond to the increase in home prices, and had to raise the conforming loan limits. In 2021, the conforming loan limit for one unit properties was $548,250. For 2022, that limit increased over 16%!

The Greatest Benefit of a Higher Conforming Loan Limit

The single greatest benefit of a higher conforming loan limit is the fact that you can secure more financing for your home! With home prices on the rise, you may not have been able to find a home in your area with the previous conforming loan limit.

What if the Conforming Loan Limit Isn’t Enough

There are times where the conforming loan limit isn’t enough to purchase the home you want. There are a few ways to combat this:

You’ll need to put more money down. The more money you put down, the less you need to finance. There is a possibility that if your down payment is big enough, you can finance the rest of the property via an FHA conforming loan.
You can apply for a conventional loan that is not conforming. A conventional loan issued by a private lender may have its own set of rules, or underwriting guidelines, the borrower must meet. Although many conventional loans may follow the guidelines set forth by the Federal Housing Finance Agency, there are still plenty of private lenders that do not follow the same guidelines. Afterall, that’s one of the greatest benefits of working with a private mortgage lender!
You can also apply for a jumbo loan. As the name suggests, a jumbo loan is used to purchase properties that are expensive. Without question, you’ll need to have fantastic credit, a low debt to income ratio, and earn a lot of money to qualify for a jumbo loan. But these loans do exist, and may help finance your next home.

Looking for a Home in 2022

The real estate market is rapidly changing, and we’re living through some truly unprecedented times. With the rapid rise of home prices, the conforming loan limits for 2022 have just increased. This increase is in your favor, as more expensive homes can still be purchased via FHA mortgages. If you’re looking for a home in 2022, it's important you are familiar with all the recent changes, and the various mortgage options available today. Call/text/email me anytime. I’m more than happy to answer any of your lending questions!

Mike McCarthy

Senior Loan Officer

(617) 620 9175 MikeMcCarthyteam@Leaderbank.com

Lender NMLS# : 449250

MLO NMLS# : 176640

Boston | Dedham | Marblehead

Is Refinancing Right For You?

Mon, 15 Nov 2021 16:56:33 GMT

Refinancing your mortgage has numerous benefits! Not only can you save money, you can reduce the number of years you borrow money for, and use the equity in your home as cash to pay for various life expenses.

It’s hard to find something that COVID-19 hasn’t impacted. Between global supply chain shortages, social distancing, classifying employees as essential or non-essential, COVID-19 has certainly reshaped and changed much of 2020 and 2021. COVIDs impact goes beyond toilet paper shortages, social distancing, and the vaccine. COVID-19 has also reshaped the entire mortgage and real estate industry. In the last 18 months, home prices have soared, while interest rates have reached historic lows. If you are a homeowner, right now may be the perfect opportunity to refinance your existing mortgage. Refinancing your mortgage has multiple benefits! From saving you money, eliminating PMI, or tapping into the equity you have in your home, refinancing is a useful tool more people should take advantage of. Let’s dive into everything you need to know about refinancing.

The Basics

Before diving into the details, let's start with the basics. What does it mean to refinance your mortgage? Refinancing a mortgage is only an option for existing homeowners. Unlike a second mortgage, refinancing does not mean you are required to pay additional monthly payments on your mortgage. On a high level, refinancing simply means you are paying off one mortgage with a new mortgage.

Why Refinance?

Why would anyone want to pay off their monthly mortgage with a new mortgage, isn’t that just a hassle? Not exactly. In fact, refinancing your existing loan provides tremendous benefits if the market has moved in your favor. And the current market is prime time to capitalize on refinancing. Consider the following:

The Interest Rate is in Your Favor

As mentioned above, the interest rate on loans has hit historic lows. Why does this matter for an existing homeowner? If you’ve purchased your home 5-10+ years ago, you may have a high interest rate. Many of our clients are receiving loans with interest rates as low as 2%. This low interest rate was unheard of in a not-so-distant past. Reducing your interest rate from 4%+ to 2% can save you quite a bit of money per month, and a great deal of money over the life of your mortgage.

The Interest Rate is in Your Favor

As mentioned above, the interest rate on loans has hit historic lows. Why does this matter for an existing homeowner? If you’ve purchased your home 5-10+ years ago, you may have a high interest rate. Many of our clients are receiving loans with interest rates as low as 2%. This low interest rate was unheard of in a not-so-distant past. Reducing your interest rate from 4%+ to 2% can save you quite a bit of money per month, and a great deal of money over the life of your mortgage.

Eliminate Mortgage Insurance

Home values have skyrocketed recently. As more and more people leave the city, and no longer commute to an office, people have flocked to homeownership. New home construction cannot keep up with the demand of people purchasing homes, which has caused home prices to accelerate at a rapid rate. If you’ve purchased a home and didn’t put 20% down, chances are you are paying mortgage insurance. However, with the rapid increase in home values, you very likely have more than 20% equity in your home now. Refinancing your home will allow you to capitalize on your home's appreciation, and can help eliminate mortgage insurance from your monthly mortgage payment. What does this mean? More money in your wallet each month!

Use the Equity as Cash

It doesn’t matter if you rent for 1 year, 5 years, or 20 years, you’ll never have the option of building equity when you are a tenant. That story is flipped if you are a homeowner. Homeowners can build equity in the home the moment they’ve closed on the property. The more equity you have in your home, the better! Equity is an asset, and this asset can be tapped into. If you ever wanted to tap into the equity in your home, or use the equity in your home as cash, you can do so via a cash out refinance option.

For example, if you purchased your home 5 years ago for $300,000, you may now owe $270,000 on the mortgage. However, your home may appraise for $425,000. The equity you have in your home is the difference between the appraised value and what you owe, or $155,000 following this example. You can tap into that equity to pay for various life expenses. Perhaps you need a new car, need to pay for your children's education, or want to renovate the house - it doesn’t matter. That money is yours to use.

Days after refinancing your mortgage, the lender will deposit a lump sum of cash into your bank account. You can effectively use this money however you please.

Take Years Off Your Mortgage

Lower interest rates mean more than just saving you money each month. Lower interest rates can also help you reduce the amount of years you have on your mortgage. For example, if you purchased your home 5 years ago with a 30 year mortgage, you currently have 25 more years before the home is paid off. Depending on your mortgage insurance payment, and the interest rate on your existing loan, you may be able to refinancing into a 20 year mortgage for around the same monthly mortgage amount. This reduces the total amount of lending time by 5 years, which will save you a considerable amount of money in the long run.

Refinancing is Easy

Another reason why refinancing is such an important option to consider is the fact that refinancing your existing mortgage is super easy to do. Appraisal waivers are becoming increasingly more popular, which simply means the homeowner can avoid needing to have someone come to their home to appraise it. Lenders can get a great understanding of the appraised value of your home by leveraging data, and reviewing recently sold homes in your area. This streamlines the entire process, saves money, and makes it virtually effortless for the homeowner. A seasoned loan officer can navigate the refinancing process with ease, and can help you unlock your savings, or tap into your equity, within a few weeks!

Timing is Everything

The real estate and mortgage industry has essentially made an X. Home values increased, while interest rates have declined. One thing is for certain, this phenomenon will not last forever. If you currently own your home, talking to a mortgage officer regarding refinancing options can’t hurt. With that said, you should certainly consider reaching out to get a better understanding of how your existing mortgage stacks up against the mortgage options on the market today.

Call/Text/Email any time,

Senior Loan Officer

617-620-9175

mikemccarthy@leaderbank.com
Lender NMLS# : 449250

MLO NMLS# : 176640

Boston | Dedham | Marblehead

The Different Types Of Mortgages - Which One Is Right For You?

Thu, 21 Oct 2021 19:43:27 GMT

There are numerous mortgage options available on the market today. Which one is right for you? We’ll review the most common mortgage options in greater detail below.

Buying a house or condo comes with a lot of considerations. Not only do you need to consider how many bedrooms you want, the number of bathrooms the property has, its location, the school district, the size of the backyard, and the color of the kitchen cabinets, you also need to figure out which type of mortgage you’ll use to finance the transaction. There are different types of mortgages on the market today, all with their own unique characteristics. If you’re unsure what the different types of mortgages are, or which one is best suited for you, read on. We’ll cover everything you need to know.

Two Parties Involved

Before diving into the details, let’s take a step back and look at a mortgage on a high level. A mortgage is an agreement between two parties, the borrower and the lender.

The Borrower - The borrower is the individual who is seeking money to purchase a property. Borrowers come in various forms. For example, one person may be requesting a mortgage, a husband/wife may be requesting a mortgage, or a group of investors coming together may request a mortgage on a property.

The Lender - The lender is a bank, credit union, or financial institution, who will lend the borrower(s) money. In exchange, the lender charges a lending fee, known as the interest rate. The lender will also require the money to be paid back over a specific number of years, which is known as the duration of the mortgage.

You Have Options with Lenders

Each lender may offer a slightly different package. The large multinational bank in your hometown may offer you an interest rate of 3% on a 30-year fixed-rate mortgage, whereas the credit union may offer 2.8% on a 30-year fixed-rate mortgage. One of the smartest things you can do as a borrower is shop around to see who is offering the most competitive all-in option.

Each Lender Will Have Options

Not only does the borrower have the choice to shop around across various lenders, but each lender may also have different options they can offer you. These options are known as the various mortgage types.

The Various Mortgage Types

The following are the most common mortgage types on the market today.

FHA Loans - FHA loans are loans backed by the Federal Housing Administration or Federal Government. The government insures these loans and guarantees the lender will not be at a loss of money if you, the borrower, default on the loan. FHA loans are a common option for the following reasons:

FHA loans do not require a large down payment. In fact, you can get an FHA loan with as little as 3.5% down
FHA loans are more lenient with their credit score requirements. You can secure an FHA loan with a credit score as low as 580.

Considering the fact that the Federal Government backs FHA loans, lenders are more inclined and comfortable lending money to people financing via an FHA loan.

Conventional Loans - Private lenders issue conventional loans, and they are certainly not backed by the Federal Government. For that reason, it could be more challenging to qualify for a conventional loan. Your credit score has to be at least 620, and your debt-to-income ratio cannot exceed 45%. You are able to secure a conventional loan with as little as 3% down, but that will require private mortgage insurance. Conventional loans provide competitive interest rates.

VA Loans - The Department of Veteran Affairs also issues loans, and these loans are backed in full by the Federal Government. VA loans are for active-duty US service members, inactive duty service members who received an honorable discharge, and eligible spouses. VA loans have numerous benefits! The two main benefits of a VA loan are: You do not need to put a single dollar down as a down payment. That is correct, VA loans can be obtained with no money down! Additionally, private mortgage insurance is not required, even if you don’t put down 20%.

Jumbo Loans - A jumbo loan is used when the property’s value is above and beyond what an FHA or conventional loan will approve. For example, if someone wanted to purchase a $1,500,000 home, with 20% down, they’d be required to finance via a jumbo loan. Jumbo loans have strict criteria. At the top of that criteria list is one’s credit score, which must be high! Additionally, they’ll need to have a high income so their debt-to-income ratio isn’t at the point of insolvency.

A Bridge Loan - A bridge loan is when one secures a loan for a very short period of time. This type of mortgage is common as one works on securing a more long-term financing option. For example, if one is purchasing another home before actually selling their existing home, they may use a bridge loan as they wait to sell their existing home. Once their existing home has sold, they’ll use that money to refinance their new home with a more conventional financing route. Bridge loans are a useful tool, but you’ll pay a premium for it by way of a higher interest rate.

Home Equity Line of Credit - A home equity line of credit, also known as HELOC, is a loan against the equity you’ve established in your home. Equity is simply the difference between what you owe on your home, and what your home is worth. For example, if you owe $200,000 on your mortgage, and your home is worth $350,000, you have $150,000 in equity. You can typically get a HELOC for 75-80% of the equity in your home. This line of credit must be repaid, but can be used for a variety of life expenses - including renovating or updating your home.

Confused About Which Loan is Right For You?

There is no shortage of decisions that must be made whenever you are buying your home. Deciding which mortgage is right for you, or which mortgage you qualify for, is amongst the most important decisions you can make. After all, your mortgage is typically for a 15-30 year period. If you have any questions about which financing option is right for you, please reach out. I’ll be happy to answer your questions, and explain in greater detail the advantages and disadvantages of each financing option.

Michael Mccarthy

Mikemccarthy@leaderbank.com

NMLS #449250

How to Qualify for a Larger Mortgage

Thu, 21 Oct 2021 19:38:18 GMT

Buying a house can be stressful. When choosing a home, sometimes your wishlist doesn't align with your budget. How can you qualify for a greater mortgage? Let's dive into that question!

Whenever you’re in the market to buy a house, it is without question an exciting time. However, it is also equally as stressful. Purchasing a home is a major commitment, and comes with serious financial considerations. One of the most challenging parts of buying a home is finding a home, in your desired area, with all the items on your wishlist, within your budget. If you’re house hunting and realize your budget is preventing you from checking off numerous items on your wish list, you know all too well how frustrating this can be. What options do you have to combat this? You can try to qualify for a higher mortgage.

The Mechanics of Lending

Lenders will use the following metrics to determine if they will be willing to lend an individual money, and how much money they are willing to lend an individual. These financial metrics are:

Your credit score
Your debt to income ratio

These financial metrics play a major role in determining if you qualify for a mortgage, and how much mortgage you qualify for. Let’s briefly discuss each metric in greater detail below, and how improving these metrics can actually help you qualify for a greater mortgage.

Your Credit Score

Your credit score is essentially your financial reputation. This metric highlights how likely you are to pay back the debt (or credit) you have. Various considerations make up a credit score, including; your bill-paying history, the number of loans you have, how long you’ve had a loan open for, your total outstanding unpaid debt, and your collections history, or lack of collections history.

A credit score typically falls within 5 categories:

Very poor = 300 - 549
Poor = 550 - 640
Fair = 641 - 699
Good = 700- 739
Excellent = 740 +

The higher your score, the better! Additionally, the higher your score, the more comfortable a lender will be with lending you money. If you have a bad credit score, increasing it before securing a mortgage can help you qualify for more money on your mortgage.

How to Increase Your Credit Score

If you’re curious how you can increase your credit score, the following bullets are some of the most basic, yet impactful, ways to do so!

First and foremost, request a free credit report from one of the credit reporting agencies. This will show you what items are negatively impacting your credit. If you identify any item that is negatively impacting your credit that you disagree with (for example, a bill is in collections, but you clearly remember paying the bill or recall cancelling your agreement with the company who is issuing you the bill), you can work with a credit repair specialist to dispute this claim. Disputing the issue will require proof on your end, but can immediately boost your credit score.
Keep your revolving debt, such as credit cards, under 30% of the credit limit. For example, if your credit card has a $10,000 credit limit, do not exceed $3,000.
Pay your bills 3 days before the “closing date” of any given statement. This shows the bank/lender you are proactive with your finances, which always looks good!
Do not apply for new accounts, or close existing bank accounts or credit cards.
If you have a family member with a long history of perfect credit, see if they can add you to one of their credit cards as an “authorized user.” This will immediately give you years of strong credit, and can certainly help elevate your credit score.

Debt to Income Levels

The other variable that will play a key role in determining if you qualify for a mortgage, and how much mortgage you qualify for, is your debt to income ratio. This is a simple financial ratio that simply divides your total monthly debt obligation by your total income.

For example, if your monthly income is $10,000 and your total monthly debt obligation is $5,000, your debt to income ratio is 50%. If your income is $10,000, and your monthly debt obligation is $2,000, your debt to income ratio is 20%.

What is considered debt? Debt and bills are not the same. Debt is something that you are obligated to pay, no matter what, based on a former agreement. A bill, such as your Hulu subscription, can be canceled at any time.

What Does Debt Look Like

Debt comes in all shapes and sizes. Common debt obligations include:

Student loans
Car payments (either a lease or finance agreement)
Credit card debt
An existing mortgage
Financing of any kind (for example, you’re financing central AC in your home)

There are various types of mortgages you can qualify for, and each mortgage has its own set of rules around one’s debt to income. However, the one common denominator is, rarely will you ever find a lender who will lend someone money that has a debt to income ratio greater than 50%.

If you’re looking to buy a home, do all you can to reduce your debt to income ratio! The lower your debt to income ratio is, the more money you’ll qualify to borrow. Pay off outstanding debt if you have the cash, or put a larger down payment down on your new mortgage. It may be uncomfortable parting with the cash, but it can help bring more of that wish list within reach.

Happy to Help

Having over a decade of experience in the industry, I can tell you first hand the best way to purchase a home is to prepare for it. Work on improving your credit score and reducing your debt to income ratio. These two financial metrics play a key role in determining IF you qualify for a mortgage, and how much mortgage you qualify for. Please contact me with any questions!

Michael Mccarthy

Mikemccarthy@leaderbank.com

NMLS #449250

What is Mortgage Insurance and Do You Need It?

Tue, 19 Oct 2021 21:45:41 GMT

Understanding what mortgage insurance is, and what options you have regarding this insurance, can save you headaches and money down the road! Let’s unpack this insurance in greater detail below.

Depending on what type of mortgage you qualify for, and how much money you put down, you may be required to carry mortgage insurance. Mortgage insurance tends to get a bad name. After all, this is insurance you - the homeowner - must pay, but this insurance does not protect you from defaulting on the loan. However, is mortgage insurance all that bad? Let’s dive into mortgage insurance in greater detail and highlight exactly why mortgage insurance isn’t bad.

What is Mortgage Insurance

Before reviewing more granular details, let’s start with the basics. What is mortgage insurance? Simply put, mortgage insurance is insurance that a lender may require you to carry. This insurance insures the risk of you defaulting on the loan. However, the caveat is - this insurance does not protect you, the homeowner. If you default on the loan, you still deal with the negative ramifications. The lender, however, will still receive their money back thanks to the mortgage insurance you carry.

When Are You Required to Have Mortgage Insurance

As mentioned above, all mortgages do not require mortgage insurance. In fact, there are a few mortgage options, such as a VA Loan or USDA, that do not require private mortgage insurance (also known as PMI). However, a VA loan and a USDA are more difficult to qualify for.

If you are financing via a conventional loan, you may be required to carry mortgage insurance depending on how much money you put down. However, you can eliminate PMI in as little as 2 years if your home appraises high enough.

If you are financing via an FHA loan (a loan issued by the Federal Housing Administration), you’ll be required to pay a mortgage insurance premium (MIP) regardless of your down payment. If your initial down payment was equal to, or greater than 10%, you’ll be required to pay MIP for 11 years. If you initially bought your home with an FHA loan, and you’re looking to get rid of the mortgage insurance, consider refinancing into a conventional loan.

How Much is Mortgage Insurance

The cost of mortgage insurance has a lot to do with your credit score and down payment. The higher your credit score is, the less the mortgage insurance will cost you as a percentage of the total loans value. The closer you get to a 20% down payment, the cheaper PMI gets in 5% increments.

Most of our clients pay less than 0.6% for private mortgage insurance. In fact, PMI can cost you as little as 0.11% of the loan amount annually. For reference, a $500K loan amount with a 0.11% PMI factor only pays $45/mo for PMI!

If you have a bad credit score, work on improving that. Not only will an improved credit score help you qualify for a loan, but it will also reduce the mortgage insurance rate.

Why Isn’t Mortgage Insurance All That Bad

Mortgage insurance tends to get a bad name. However, there is plenty of good that must be understood.

First and foremost, mortgage insurance makes homeownership possible for millions of Americans. Saving 20%+ for a down payment can be nearly impossible for plenty of people, yet, the dream of owning a home is something they want to accomplish. With the introduction of mortgage insurance, lenders are more comfortable lending money to people who aren’t putting down a large down payment. You no longer need to help pay off your landlord’s mortgage, and you can own a home, and build equity, with as little as 3.5% down!

Secondly, mortgage insurance does not need to be permanent. As your home appreciates in value, or as you reach that magic 78% figure, your mortgage insurance can drop off your loan. There are plenty of ways to help boost the value of your home, which we’ll briefly touch on below. You can also consider refinancing your mortgage to help reduce, or eliminate mortgage insurance.

How to Increase Your Home Equity

If you currently have mortgage insurance or will need mortgage insurance on your mortgage, you may be wondering how can you increase your equity to 20% as quickly as possible. Here are a few things to keep in mind:

First and foremost, as you pay your mortgage each month, you will naturally build equity. It can take a few years to reach that 20% equity benchmark depending on how large your down payment was. But by simply paying your mortgage each month, you will eventually reach 20% equity on your loan.
If you want to accelerate how quickly you reach 20% equity, you can always do home improvements and upgrades. Common home improvements/upgrades include:
Refinishing the floors
Replacing an old roof
Professionally painting the interior or exterior of your home
Having the yard properly landscaped, with shrubs, plants, well-maintained mulch beds, etc.
Renovating rooms can also drastically increase the value of your home. Perhaps you finish the basement, update the kitchen or bathroom, or add an extra bedroom. All of these renovations can improve your home value, and may be able to push you over that magic 20% benchmark.

Once your projects are complete, you’ll need to get the house reappraised. This fee can be a few hundred dollars, but the appraised value will highlight what your home is worth. The difference between what you’re home is worth, and what you owe on your mortgage, is your equity.

Working with the Right Mortgage Broker

An honest mortgage broker will explain all the details regarding mortgage insurance to you before you sign the paperwork. They can discuss the disadvantages and advantages of each mortgage option, so you have a clear understanding of which one may be best suited for you. Online calculators, even on Zillow or Redfin, can have inaccurate information and could set poor expectations as they assume the most conservative costs. If you’re looking to get a thorough understanding of the all-in cost of the mortgage, the most accurate way to do so is to work with an honest loan officer. If you have any questions, please do not hesitate to reach out!

Michael Mccarthy

Mikemccarthy@leaderbank.com

NMLS #449250