Private mortgage insurance (PMI) is insurance for the mortgage lender in the event of homeowner default.
PMI helps the lender recover its costs and losses after foreclosing and selling a repossessed home.
PMI rates vary by loan type, loan size, and loan characteristics. The higher the risk to the bank, the higher the cost of PMI.
The two types of PMI are:
Borrower-paid MI is the more common version of PMI. It may be payable up front, payable monthly, or both. However, once the mortgage balance is reduced to 80% of the home's value, PMI may no longer be required by a lender.
This reduction can occur by principal being paid down, home appreciation, or a combination of the two.
With lender-paid PMI, there is no monthly payment because the mortgage note's interest rate is increased and is, therefore, "self-insuring". That is, the lender collects higher payments each month and usually buys an insurance policy with the extra proceeds.
Different from private mortgage insurance is another type of insurance called homeowners insurance, or hazard insurance.
HOI is property insurance that protects against losses in the event of a catastrophe.
Mortgage lenders require borrowers to carry homeowners insurance because it protects the bank if the home is destroyed. However, it's a good idea to have additional coverage for personal property and for liability related to accidents that occur on-site.
For example, if a home is destroyed in a fire:
HOI is typically paid in annual installments to an insurance company and rates vary by type of home and type of coverage requested.
SourcesPrivate Mortgage InsuranceWikipediahttp://en.wikipedia.org/wiki/Private_mortgage_insurance
Home InsuranceWikipediahttp://en.wikipedia.org/wiki/Home_insurance
During the Holiday Season, economists watch consumer spending intently because it makes up two-thirds of the U.S. economy.
When spending is stronger-than-expected, it can lead to inflation which pushes mortgage rates higher.
So far this season, mortgage shoppers should be in good spirits. Sales have fallen four weeks in a row and the outlook for a late-December rally are bleak.
But there's more to the story than the headline, though.
When store report "sales" data, they don't report gift card sales.
Gift cards are only accounted for when they are redeemed for actual store merchandise.
So, with gift card sales projected to reach $26 billion this year, there is a $26 billion "shortfall" in the sales figures. That $26 billion will likely get booked in January when shoppers spend their "free money".
For as much as mortgage rates may fall on weak sales data in December, therefore, rates could surge higher when January's sales data is released.
Higher sales levels can lead to inflation and that is the enemy of mortgage bonds. WIth inflation comes higher mortgage rates.
SourceRetail Rush Falls Short, Now Come More Sales Kris Hudson, Ann Zimmerman And Vanessa O'ConnellThe Wall Street Journal Online, December 26, 2007http://online.wsj.com/article/SB119859964475049505.html
The headlines say that home prices are down 6.7 percent from a year earlier. It's important to recognize that this is a national figure.
"National" has nothing to do with real estate. Real estate is local.
The chart above is from the latest S&P/Case-Shiller home-price index and -- averaged out -- shows that home prices are declining nationwide. Some areas are showing growth (or flatness):
And, in every town included in the survey, there are neighborhoods that are faring quite well, despite an overall sluggishness.
Real estate prices are local. Street by street even. National surveys like the S&P/Case-Shiller home-price index paints a broad picture of our nation's real estate market, but that level of reporting doesn't do much on a level that's actually relevant to Americans.
SourcePace of Decline In Home Prices Sets a RecordJames R. Hagerty And Kelly EvansThe Wall Street Journal Online, December 27, 2007http://online.wsj.com/article/SB119867779499850669.html
After Thursday's passage of the Mortgage Forgiveness Debt Relief Act of 2007, foreclosed homeowners have one less worry: taxes.
When a homeowner defaults on a home loan, a mortgage lender will sometimes "forgive" the debt owed.
One example is when a foreclosed home sells for less money than is owed on it. The mortgage lender will sometimes accept this lesser amount, while considering the mortgage to be "paid in full".
This is often called a "short sale" because the lender is "short" of the full amount owed.
Prior to Thursday, the IRS treated the forgiven mortgage debt as taxable income. This added thousands of dollars to a foreclosed homeowner's tax liability.
A $50,000 short sale, for example, could yield an additional $12,500 in taxes owed.
After the bill's passage, that tax liability is gone. No taxes will be owed on primary residence mortgage debt that is forgiven or written off by a mortgage lender.
The bill has two sides, though.
In order to recover the estimated $650 million in tax revenue that will be lost, Congress has limited the amount of tax breaks available on the sale of second/vacation homes. That will be impactful on homeowners, too, of course.
If you think the Mortgage Forgiveness Debt Relief Act of 2007 will impact you personally, be sure to talk with your accountant.
The resurgence of private mortgage insurance continues -- if only because it's aided by Congress.
For eligible homeowners, lawmakers voted to extend the tax-deductibility of PMI through 2010. The law was previously scheduled to expire at the end of 2007.
For all loans originated prior to December 31, 2010, and within those years, private mortgage insurance is 100% tax-deductible provided that two tests are met:
For households earning more than $100,000, the deduction is phased out to the tune of 10% per $1,000 of additional income until it reaches 0% at $110,000.
So, if a single person earns $90,000 in 2007 and buys a home using PMI, the PMI expenses are tax-deductible in 2007. If that person's income exceeds the threshold prior to 2010, the deduction is phased out.
As always, talk with your tax professional about how tax deductions work and whether you qualify for a PMI deduction.
Even if you've been recently pre-qualified (or pre-approved) for a mortgage, it may be prudent to get "re-approved".
The mortgage industry is changing quickly; being prepared beats the alternative.
Recently, mortgage lenders have made adjustments in what they will lend, and to whom. This shrinks the pool of eligible mortgage borrowers.
Some of these guideline changes include:
In addition to tighter guidelines, many mortgage lenders are now required to pass higher fees and/or mortgage rates along to their clients as well.
The burden of these mandatory extra costs will be the difference-maker in a mortgage approval for some mortgage applicants.
Getting re-approved can give home buyers a realistic sense of how mortgage financing may shape up in the changed mortgage environment. It's important to make sure that the mortgage plan still fits into your short- and long-term financial goals.
But, if nothing else, getting re-approved gives you the opportunity to speak with your real estate and loan officer about changes to the industry, and how it impacts you on a personal level.
For most Americans (but not all), mortgage interest is tax-deductible in the year in which it was paid.
With some advance planning, therefore, a homeowner can increase his 2007 tax deductions by paying additional mortgage interest while the calendar still reads 2007.
The key is to make the mortgage payment due January 2008 a few days early.
Because mortgage interest is paid in arrears, a mortgage payment due January 1, 2008 accounts for interest that accumulated throughout December 2007.
Rather than make January's mortgage payment on January 1, 2008, a homeowner can send payment this week or next -- while it's still 2007 -- and increase the amount of mortgage interest paid in 2007. This can increase 2007's tax deductions.
Tax planning can be a complicated issue and not all homeowners qualify for mortgage interest tax deductions. Be sure to consult your tax professional before making any tax planning decisions. If you are without a tax professional, call or email me; I would be happy to make a trusted recommendation to you.
Last week proved once again: The Fed does not control mortgage rates.
On Tuesday, after the Federal Open Market Committee lowered the Fed Funds Rate by 0.250%, mortgage rates began an ascent that carried all the way through Friday's close.
As a result, mortgage rates are dramatically higher today than just one week ago.
Other factors contributing to last week's run-up in mortgage rates:
All three of these items point to inflation, the enemy of mortgage bonds. Inflation tends to push mortgage rates up.
This week, there isn't much new data of importance until Friday's Personal Consumption Expenditures release. PCE is the Federal Reserve's preferred measure of how much more (or less) everyday living is for Americans.
As the week progresses, expect increasing volatility in mortgage rates.
Market players will be in short supply because of holiday parties, half-days, and vacations. Fewer buyers and sellers in a marketplace mean finding the "right price" is more challenging.
(Image courtesy: The Wall Street Journal Online)
Conforming mortgages are getting more expensive -- but not because of mortgage rates.
To protect against further weakness in the housing sector, Fannie Mae and Freddie Mac are instituting "delivery fees" on all conforming mortgages, effective March 2008.
Fannie Mae's Adverse Market Delivery Charge and Freddie Mac's Market Condition Delivery Fee will add a one-time, quarter-percent fee to every home loan purchased from mortgage originators.
This means that on a $100,000 conforming mortgage, the borrower could:
Because the fee is in percentage terms, as the loan size increases, so does the fee. A $300,000 mortgage will carry a $750 fee, for example.
Unfortunately, mortgage borrowers may not get to choose on how they pay the extra cost. Many mortgage lenders are just adding it to their rate sheets.
Be aware, the 0.25% fee does not apply to all loans -- only to loans sold to Fannie Mae and Freddie Mac. This specifically excludes portfolio loans and sub-prime loans.
If you're not sure for what type of loan you are applying, be sure to ask.
The Fed lowered the Fed Funds Rate by 0.250%. The rate decrease was not well-received, though, as many investors were calling for a deeper cut of a half-percent.
In response, dollars moved from stock markets to bond markets and, therefore, mortgage rates fell.
Because it is tied to the Fed Funds Rate, Prime Rate fell by 0.250% yesterday, too. Holders of home equity lines of credit and credit card debt benefited from the change and will see lower interest costs in next month's statements.
In the statement above -- as explained by The Wall Street Journal -- the Fed expresses concern about the consumer and business slowdowns. This leaves the possibility of future Fed Funds Rate cuts open.
SourceParsing the Fed StatementThe Wall Street Journal OnlineDecember 11, 2007http://online.wsj.com/public/resources/documents/info-fedparse0712.html
The Federal Open Market Committee meets today and will release a public statement at 2:15 P.M. ET.
It is widely expected that the FOMC will lower the Fed Funds Rate by at least 0.250%.
When the FOMC lowers the Fed Funds Rate, it is trying to "loosen" credit for American businesses and consumers. When credit is "looser", it is cheaper, and easier to procure.
Looser credit promotes spending and propels the U.S. economy forward.
By contrast, when the FOMC raises the Fed Funds Rate, it is trying to "tighten" credit which, in turn, slows down the U.S. economy.
The FOMC does not control mortgage rates, but it does have a direct impact on Prime Rate because (Prime Rate) = (Fed Funds Rate) + (3.000%).
Credit cards, construction loans and home equity lines of credit are all tied to Prime Rate and so interest rates are expected to fall on these loan types this afternoon.
Among lingering doubts about housing and credit markets, and a general uncertainty about the U.S. economy, the mortgage bond market tanked towards the latter part of last week.
As investors moved away from mortgage bonds, mortgage rates forcefully bounced off their two-year lows.
A major factor behind last week's run-up in rates is the market expectation for Tuesday's Federal Open Market Committee meeting.
Those expectations sharply shifted after Friday's strong employment report from the Census Bureau and dragged rates along with them.
Prior to the jobs report, markets were expecting that the FOMC would lower the Fed Funds Rate by a half-percent. After the report's data showed inflationary hints, though, that expectation changed to a quarter-percent.
This is important to mortgage rate shoppers because inflation is the enemy of mortgage bonds. Typically, as inflation rises, so do mortgage rates.
The FOMC adjourns from its one-day meeting Tuesday and will make an announcement to the markets at 2:15 P.M. ET. Expect volatility before and after the press release.
Currently, the Fed Funds Rate sits at 4.500%.
Also hitting the wires this week is the Consumer Price Index (Wednesday) and the Producer Price Index (Thursday). These two reports are closely tied to inflation, too, so if the readings come in hotter than expected, mortgage rates will move higher in response.
CPI is also known as "The Cost of Living" index. PPI is its "business" counterpart.
Thursday, the White House revealed its HOPE NOW program, aiming to help sub-prime borrowers freeze their initial "teaser" rates for a period of five years.
The program is receiving a lot of ink in the newspaper dailies but sometimes it's unclear exactly what the program offers, and to whom.
Let's look at the details and see who qualifies and who doesn't.
Mortgage loan type
Qualifies: Sub-prime mortgageDoesn't qualify: everyone else.
Date of mortgage origination
Qualifies: January 1, 2005 to July 31, 2007Doesn't Qualify: Everyone else
Date of first interest rate reset
Qualifies: January 1, 2008 to July 31, 2010Doesn't qualify: Everyone else
Previous mortgage delinquencies
Qualifies: No more than one 60-day late in the last 12 monthsDoesn't qualify: Multiple 60-day lates, or one 90-day late
Potential payment increase
Qualifies: Payment will increase by more than 10% at first adjustmentDoesn't qualify: Everyone else
Credit score
Qualifies: Less than 660; less than 10% improvement since closingDoesn't qualify: Everyone else
Because of the restrictions, only a small subset of the 1.8 million sub-prime loans issued between January 1, 2005 and July 31, 2008 are eligible for the rate freeze. A New York Times article estimates that figure to be 360,000.
For homeowners not qualified for the HOPE NOW program, mortgage servicers will attempt remortgage their loans, or evaluate the homeowner for a rate reduction and/or for debt forgiveness on a case-by-case basis.
If you're not sure whether you have a sub-prime loan, or whether you can benefit from the "interest rate freeze" program, reach out to your loan officer or call HOPE NOW.
SourceWho Qualifies for Help, And What Qualifies as Subprime?Ruth SimonThe Wall Street Journal OnlineDecember 7, 2007
Credit scores are the best predictor of how a homeowner will pay on a mortgage, so it's no surprise that credit scores will play a bigger role in mortgage financing in 2008.
Actually "that date" is more clearly defined. It's March 1, 2008.
For loans closing on or after March 1, 2008, Fannie Mae and Freddie Mac will subject the bulk of their mortgage products hefty fees when the loan-to-value exceeds 70%.
Credit scores will determine the amount of the rate adjustment.
For example, a person with a $250,000 mortgage rate would face a "credit-based fee" of $3,125 just because they carry a 650 credit score. It would jump to $4,375 for a 635 credit score.
Alternatively, this fee can be "financed" into the mortgage instead of paid as cash. The general rule is that for every 1.000% in fees, you can exchange it for a 0.250% increase to rate. This is just a guideline, of course -- every mortgage lender has its own pricing scheme.
Because the credit score adjustment is not into effect for loans closing prior to March 1, 2008, there is plenty of time to be proactive if you think you'll trigger the new rule.
If you are planning to purchase a home on or after March 1, 2008, it would be prudent to have your credit scores checked as soon as possible. If your scores are below 680, or teetering on the edge, take ownership of your credit and start working to improve your score.
A terrific source of non-biased credit scoring information is myFICO.com.
October's New Homes Sales report showed a modest month-over-month improvement from September.
Before we interpret that to mean that the housing market is rebounding, though, let's consider the fallibility of the New Home Sales report.
On the Census Bureau's Web site, there is a disclaimer about the validity of the data. Paraphrased, it reads:
A new housing unit is considered sold when a contract is signed and/or earnest money is exchanged. There is no follow up to verify if the sale was closed, or canceled. Therefore, if cancellations are high, the New Homes Sales data can be overestimated.
A new housing unit is considered sold when a contract is signed and/or earnest money is exchanged. There is no follow up to verify if the sale was closed, or canceled.
Therefore, if cancellations are high, the New Homes Sales data can be overestimated.
Couple that with the 35-45% cancellation rates as reported by builders and you start to get the picture.
However! The disclaimer also includes the following text (again, paraphrased):
A housing unit will never be counted twice so if a previously canceled unit is later sold again, the Census Bureau does not count this sale a second time. Therefore, when demand is strong, New Home Sales can be underestimated.
A housing unit will never be counted twice so if a previously canceled unit is later sold again, the Census Bureau does not count this sale a second time.
Therefore, when demand is strong, New Home Sales can be underestimated.
In other words, the New Homes Sales report overestimates sales figures in a weak market, and underestimates them in a strong market.
The long-term impact of October's New Homes Sales report is unclear. The only thing that is clear is that the monthly New Homes Sales report doesn't tell us a whole lot.