Friday, December 29, 2017

When a Good Thing is Not Necessarily a Good Thing

I received a very good note today from a local lender and friend that I felt was worth sharing. It's about a new loan program that's out there. Read On!


Always ask the questions………..

In life I have found that when it sounds too good to be true, it usually is.  Like a 95% loan with no mortgage insurance.  Sounds good on the surface……I want that, right?  Why wouldn’t I?  But we are all smart enough to ask the next question and peel back the layers on the onion a bit more. 

What is being “marketed” as no mortgage insurance is really what is referred to as Lender Paid Mortgage Insurance.  All first mortgages that are over 80% (less than 20% down without a 2nd/HELOC) cannot be sold to Fannie and Freddie (remember those guys are the ones buying 90% of all the mortgages funded throughout the country) without mortgage insurance included.

So how does that “No MI” work?  The lender simply raises the rate a little to get enough credit from the secondary market to pay the MI vs the buyer paying the MI.  Typically the rate on the mortgage is increased about .375% to .625% more than just locking the lower rate with the MI.  There is still MI there folks!  Any lender can do this and we have done it throughout the years depending on the buyer’s individual circumstances.

Sounds simple, I still want it right?  Well wait a minute………….  If my rate is higher to pay the MI fee, when does my rate drop down/off like MI does after my loan is 80% loan to value?  It doesn’t, that’s the big catch.  The rate stays the same for the life of the loan. 

So to keep it simple an example might be your buyer wants to buy a home for $500k and take out a 30 year fixed at $475k. 

·        Let’s say the rate on that is 4.0% with a principal and interest (P&I) payment of $2,268/month + with MI (.41%) of $163 for a total PIMI payment of $2,431/monthly
o   The borrower may be able to request the removal of MI after 2 years, assuming market appreciation on the home coupled with principal paydown of the mortgage through regular payments.  So in 2 years the borrower has paid the loan down on a normal amortization and the home has appreciated so the current mortgage balance is now 80% or less of the current fair market value.  They call the lender and request the removal of MI and now their payment is back to $2,268 for the remaining 28 years of the mortgage.

·        But they opt instead for the No MI loan.  The rate is higher always than a MI loan so let’s use .5% as the average rate increase to get rid of (lender pays for) the MI. 
o   Here the P&I payment is $2,406/monthly + zero MI (it was paid for remember).  This is it for the life of the loan.  No payment drop like in the example above.  Stuck with the higher rate until the end.  That’s $138 more per month for 28 years or $46,368 more for the life of the loan.

That all said, there are times where a buyer can strategically use a “NO MI” loan.  The only way to really know what’s right is for the Loan Officer to use their professionalism and go deep to understand the buyer’s needs and goals.

This is what makes great loan officers great!



LISA MAZZEI

Loan Officer

NMLS ID# 282885

http://summitfunding.net/esigs/upload/970828_Lisa%20Mazzei%20circle.png

O. (831) 626-2112 Ext: 104

C. (831) 212-0170

F. (831) 250-6233

E. lisa@blueadobemortgage.com

W. www.blueadobemortgage.com/lmazzei